As filed with the Securities and Exchange Commission on November 12, 1999
Registration No. 333-86517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
JV CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
---------------
Delaware 51-6513830
(I.R.S. Employer Identification No.)
(State of Organization)
c/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
Attention: Corporate Trust Administration
(302) 651-1000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
John W. Blenke, Esq.
c/o Household Finance Corporation
2700 Sanders Road
Prospect Heights, IL 60070
847-564-6150
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------
Copies to:
Jordan M. Schwartz, Esq. A. Bradley Ives, Esq.
Cadwalader, Wickersham & Taft Kennedy Covington Lobdell & Hickman,
100 Maiden Lane L.L.P.
New York, New York 10038 100 North Tryon Street, 42nd Floor
Charlotte, North Carolina 28202
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Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each class of Amount being Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit(1) aggregate offering price(1) registration fee
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Residential Mortgage-
Backed Certificates
(the "Certificates")
issued in Series..... $1,000,000 100% $1,000,000 $278(2)
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(1) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
(2) Previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. The Depositor may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus supplement is not an offer to sell these securities and is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 3, 1999
PROSPECTUS SUPPLEMENT
(To prospectus dated , 19 )
$ (Approximate)
JV CAPITAL Series 19 - Trust Fund
Issuer
JV CAPITAL TRUST
Depositor
HOUSEHOLD FINANCE CORPORATION
Master Servicer
Residential Mortgage Pass-Through Certificates, Series 19 - , Class A
Principal And Interest Payable Monthly, Beginning In 19
You should The JV Capital Series 199 - Trust Fund will offer the
carefully following certificates by this prospectus supplement and
consider accompanying prospectus:
the "Risk
Factors" .One class of senior Class A certificates.
beginning
on page S- A summary chart of the initial certificate balances, pass-
13 of this through rates, payment characteristics and ratings of all
prospectus certificates issued by the trust fund is set forth on page S-
supplement. 4.
Neither the The assets of the trust fund will consist primarily of:
Class A
certificates Fixed-rate, conventional, fully-amortizing mortgage loans
nor the secured by first liens and second liens on one- to four-
mortgage family properties having original terms to maturity not
loans are exceeding 30 years.
insured or
guaranteed . Additional credit enhancement for the Class A certificates
by any in the form of an irrevocable financial guaranty insurance
governmental policy issued by which will cover shortfalls in
agency or amounts due to be distributed on the Class A certificates.
instrumentality.
The Class A
certificates
represent
interests
in the
trust fund
only and
will not be
obligations
of JV
Capital
Trust or
any other
entity.
This
prospectus
supplement
may be used
to offer
and sell
the Class A
certificates
only if it
is
accompanied
by the
prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Class A certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Class A certificates will be offered by [First Union Securities, Inc.]
[Other Underwriter], as underwriter, at varying prices to be determined at the
time of the sale to investors. Total proceeds to the depositor for the Class A
certificates will be approximately $ before deducting expenses estimated at
$ , plus accrued interest from to the closing date.
[Other Underwriter]
[First Union Securities, Inc.]
The date of this prospectus supplement is , 19 .
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
Information is provided to you about the Class A certificates in two separate
documents that progressively provide more detail:
. the prospectus, which provides general information, some of which may
not apply to your certificates; and
. this prospectus supplement, which describes the specific terms of your
certificates.
You should rely on the information in this prospectus supplement for the
particular terms of your certificates.
Cross-references are included in this prospectus supplement and the
prospectus to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the prospectus provide the pages on which these captions are located.
----------------
S-2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Important Notice About Information Presented in this Prospectus
Supplement and the Accompanying Prospectus.............................. S-2
The Series 199 - Certificates........................................... S-4
Summary of Terms of the Certificates..................................... S-5
The Mortgage Loans...................................................... S-6
The Certificates........................................................ S-6
Priority of Distribution................................................ S-7
Interest Distributions.................................................. S-7
Principal Distributions................................................. S-8
Credit Support.......................................................... S-8
Optional Termination.................................................... S-9
Prepayment and Yield Considerations..................................... S-10
Federal Income Tax Consequences......................................... S-10
ERISA Considerations.................................................... S-11
Legal Investment Considerations......................................... S-11
Certificate Ratings..................................................... S-12
Risk Factors............................................................. S-13
Limited Liquidity May Adversely Affect Your Ability to Resell
Certificates........................................................... S-13
Unpredictability of Prepayments May Adversely Affect Yield on
Certificates........................................................... S-13
Book-Entry System May Limit Rights of Beneficial Owners................. S-14
Limited Nature of Certificate Ratings................................... S-14
Delays and Expenses Associated With Legal Actions May Delay
Distributions on Certificates.......................................... S-15
Risk of Loss is Greater on Second Lien Mortgage Loan.................... S-15
Geographic Concentration May Increase Risk of Loss and Deliquency....... S-15
Page
----
Consumer Protection Laws May Limit Remedies............................... S-16
Year 2000 Readiness Disclosure............................................ S-16
Forward-looking Statements................................................. S-18
Defined Terms.............................................................. S-18
The Mortgage Pool.......................................................... S-18
Mortgage Loan Characteristics............................................. S-18
Underwriting.............................................................. S-23
Delinquency and Loan Loss Experience of Master Servicer.................... S-24
Prepayment and Yield Considerations........................................ S-25
Weighted Average Life of the Class A Certificates......................... S-27
Description of the Certificates............................................ S-29
General................................................................... S-29
Distributions on the Certificates......................................... S-30
Subordinated Certificates................................................. S-32
Certificate Insurance Policy.............................................. S-33
Master Servicing Compensation and Payment of Expenses..................... S-33
Optional Purchase of Defaulted Mortgage Loans............................. S-34
Advances.................................................................. S-34
Optional Termination...................................................... S-35
Miscellaneous............................................................. S-35
The Trustee............................................................... S-37
The Certificate Insurance Policy and the Certificate Insurer............... S-37
Federal Income Tax Consequences............................................ S-39
Legal Investment........................................................... S-41
Erisa Considerations....................................................... S-41
Underwriting............................................................... S-43
Experts.................................................................... S-44
Legal Opinions............................................................. S-44
Ratings.................................................................... S-45
Glossary of Terms.......................................................... S-46
S-3
THE SERIES 199 - CERTIFICATES
Initial Rating
of Offered
Initial Certificates(3)
Certificate Pass-Through ---------------
Class Balance(1) Rate Principal Types(2) Interest Types(2) [ ] [ ]
----- ----------- ------------ ---------------------- ----------------- --- -------
Offered Certificates
Class A................. $ % Senior, Sequential Pay Fixed Rate
Non-Offered Certificates
Class B................. $ % Subordinated Fixed Rate N/A N/A
Class R................. (4) (4) Subordinated (4) N/A N/A
- --------
(1) Approximate. The initial certificate balances are subject to adjustment as
described herein.
(2) See "Description of the Certificates--Categories of Classes of
Certificates" in the prospectus for a description of the principal and
interest categories listed.
(3) A description of the ratings of the offered certificates is set forth under
the heading "Certificate Ratings" on page S-12 of the summary information
and under "Ratings" in the main text of this prospectus supplement.
(4) The Class R certificates have no certificate balance and are not entitled
to interest distributions.
S-4
SUMMARY OF TERMS OF THE CERTIFICATES
This summary highlights selected information from this prospectus supplement.
It does not contain all of the information that you need to consider in making
your investment decision. To understand the terms of the offered certificates,
you should read this entire prospectus supplement and the prospectus carefully.
Title of series:
JV Capital Trust Residential Mortgage Pass-Through
Certificates, Series 199 -
Depositor: JV Capital Trust
Issuer:
JV Capital Series 199 - Trust Fund
Master servicer: Household Finance Corporation
Trustee:
Certificate
insurer:
Distribution The 25th day of each month, or, if not a business day, the
date: next business day, beginning 25, 199
On or about , 199
Closing date:
Cut-off date: 1, 199
Record date: The last business day of the month preceding a distribution
date
S-5
The Mortgage Loans
The mortgage loans will consist of first lien and second lien, fixed-rate,
one- to four-family residential mortgage loans having original terms to stated
maturity not exceeding 30 years.
The depositor expects the mortgage loans to have the following
characteristics:
Summary Of Mortgage Loans
Characteristics as of the Cut-off Date
(Approximate)
Aggregate Outstanding Principal Balance.............. $
Number of Mortgage Loans.............................
Weighted Average Mortgage Rate....................... %
Range of Mortgage Rates.............................. % to %
Weighted Average Loan-to-Value Ratio at Origination.. %
Weighted Average Remaining Term to Stated Maturity... months
Range of Remaining Terms to Stated Maturity.......... months to months
Range of Outstanding Principal Balances of Mortgage
Loans............................................... $ to $
Average Outstanding Principal Balance of Mortgage
Loans............................................... $
Latest Maturity Date................................. 20
Percent of Mortgage Loans with Loan-to-Value Ratios:
Less Than or Equal to 70%.......................... %
Greater Than 70% and Less Than or Equal to 80%..... %
Greater Than 80%................................... %
Percent of Mortgage Loans which are Second Lien...... %
The Certificates
The depositor will issue the certificates under a pooling and servicing
agreement, to be dated as of the cut-off date, among the depositor, the master
servicer and the trustee. The certificates will have the approximate
certificate balance as of the closing date set forth on page S-4 of this
prospectus supplement. Any difference between the certificate balance of the
Class A certificates as of the closing date and the approximate certificate
balance of the Class A certificates as of the date of this prospectus
supplement will not exceed 5% of the initial certificate balance of the Class A
certificates. The Class A certificates will evidence approximately %
undivided interest in the certificate balance of the mortgage loans and the
Class B certificates will evidence the remaining approximate %. The Class R
certificates have no certificate balance and do not represent any interest in
the principal balance of the mortgage loans. The Class B and Class R
certificates are subordinated in certain respects to the Class A certificates.
See "Description of the Certificates" in this prospectus supplement.
S-6
Priority of Distribution
On each distribution date, the amount available for distribution on the
certificates will be distributed in the following amounts and order of
priority:
. first, to the Class A certificates, interest, including any previously
undistributed shortfalls in distributions of interest due on the Class A
certificates;
. second, to the Class A certificates, the amount of principal required to
be distributed;
. third, to the certificate insurer, the monthly premium due on the
certificate insurance policy;
. fourth, to the certificate insurer, an amount equal to any previously
unreimbursed payments made under the certificate insurance policy and any
fees and expenses owed to it under the related insurance agreement,
together with interest on these amounts;
. fifth, to the reserve fund, the amount required to be deposited in the
reserve fund;
. sixth, to the Class B certificates, interest, including any previously
undistributed shortfalls in required distributions of interest on the
Class B certificates;
. seventh, to the Class A certificates an amount equal to the principal
losses, if any, for the mortgage loans for the distribution date and all
prior distribution dates that have not previously been distributed under
this clause;
. eighth, to the Class B certificates, the amount of principal required to
be distributed;
. ninth, to the Class B certificates, certain additional amounts in respect
of principal not previously distributed to them under this clause; and
. tenth, any remaining funds to the Class R certificates.
All of these distributions are subject to the limitations set forth in this
prospectus supplement under "Description of the Certificates--Distributions on
the Certificates."
As a result of delinquencies, losses or shortfalls on the mortgage loans,
distributions that would otherwise be made on the Class B and Class R
certificates may be made on the Class A certificates instead. See "Description
of the Certificates--Subordinated Certificates" in this prospectus supplement.
Interest Distributions
The amount of interest that will accrue on your Class A certificates each
month is equal to:
. one-twelfth of the pass-through rate for your class set forth on page S-4
multiplied by the certificate balance of your certificate on the
distribution date, minus
S-7
. the amount of certain interest shortfalls arising from the timing of
prepayments on the mortgage loans and certain interest losses allocated
to your class, as described under "Description of the Certificates--
Distributions on the Certificates" in this prospectus supplement.
Principal Distributions
The calculation of the amount of principal that the Class A and Class B
certificates are entitled to receive on each distribution date is described
under "Description of the Certificates--Distributions on the Certificates" in
this prospectus supplement.
Credit Support
Credit support for the Class A certificates is provided by:
. the subordination of the Class B and Class R certificates to the Class A
certificates;
. a reserve fund; and
. an irrevocable financial guaranty insurance policy issued by the
certificate insurer.
Subordination
If you own a Class A certificate, the credit support for your certificates is
provided as follows:
. On each distribution date, you will receive all amounts of interest and
principal you are entitled to before the Class B and Class R certificates
receive any amounts. If there are not sufficient funds on a distribution
date to pay you all amounts of interest and principal you are entitled
to, an amount equal to this shortfall will carry over to future
distribution dates. On future distribution dates you not only will be
entitled to receive the required amount of principal and interest for
those distribution dates but also the amount of any shortfalls from prior
distribution dates before the Class B and Class R certificates receive
any amounts.
. If the amount available for distributions on the certificates is not
sufficient to pay the Class A certificates an amount equal to the
principal portion of losses on the mortgage loans, the Class B
certificates will bear any of these losses through a reduction of their
certificate balance.
Additional credit support is provided by:
. the allocation of all principal prepayments to the Class A certificates
for the first years; and
. disproportionately greater allocations of prepayments to the Class A
certificates than to the Class B certificates over the following years.
S-8
The disproportionate allocation of prepayments will accelerate the
amortization of the Class A certificates relative to the Class B certificates
while, in the absence of principal losses that decrease the certificate balance
of the Class B certificates, increasing the Class B certificates' percentage
interest in the principal balance of the mortgage loans.
Reserve Fund
On the closing date, a reserve fund will be established. This reserve fund
will be funded over time from the amount available for distributions on the
certificates. The amount in the reserve fund will be used to make required
payments of principal and interest on the Class A certificates to the extent
necessary.
You should be aware however that:
. The amount in the reserve fund at any time will not exceed $ .
. The amount from the reserve fund used to cover shortfalls to the Class A
certificates over the life of the certificates cannot exceed $ .
Certificate Insurance Policy
The certificate insurance policy will cover:
. Shortfalls in the required distributions of interest and principal to the
Class A certificates not covered by amounts from the reserve fund.
The certificate insurance policy will not cover:
. Certain shortfalls in interest arising from the timing of prepayments on
the mortgage loans and certain interest losses on the Class A
certificates.
The certificate insurance policy will not protect you against a lower yield
on your Class A certificates than you expected based on your assumed rate of
prepayments on the mortgage loans.
See "Description of the Certificates--Certificate Insurance Policy" in this
prospectus supplement.
Optional Termination
The master servicer may repurchase from the trust fund all mortgage loans
remaining outstanding on any distribution date when the aggregate unpaid
principal balance of the remaining certificates is less than 10% of the
principal balance of the certificates on the cut-off date.
If the master servicer exercises its right to repurchase all of the mortgage
loans, the certificates outstanding at that time will be retired earlier than
would otherwise be the case.
S-9
See "Description of the Certificates--Optional Termination" and "Prepayment and
Yield Considerations" in this prospectus supplement.
Prepayment and Yield Considerations
The yield to maturity on your Class A certificates will be sensitive to the
rate and timing of principal payments, which will be affected by prepayments,
defaults and liquidations, on the mortgage loans. As a result, your yield may
fluctuate significantly.
. In general, if you purchased your Class A certificates at a premium and
principal distributions occur at a rate faster than you assumed, your
actual yield to maturity will be lower than anticipated.
. Conversely, if you purchased your Class A certificates at discount and
principal distributions occur at a rate slower than you assumed, your
actual yield to maturity will be lower than anticipated.
Because the mortgage loans may be prepaid at any time, it is not possible to
predict the rate at which you will receive distributions of principal. Since
prevailing interest rates change from time to time, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
Class A certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your Class A certificates.
See "Prepayments and Yield Considerations" in this prospectus supplement and
"Yield and Prepayment Considerations" in the prospectus.
Weighted Average Lives (in years)
SPA
-------------------
Class % % % % %
- ----- --- --- --- --- ---
A
The weighted average lives in the preceding table are determined as described
under "Prepayment and Yield Considerations--Weighted Average Life of the
Class A Certificates" in this prospectus supplement. Prepayments will not occur
at any assumed rate shown or any other constant rate, and the actual weighted
average lives of the Class A certificates are likely to differ from those
shown, perhaps significantly.
Federal Income Tax Consequences
The trustee will make an election to treat the assets of the trust fund as a
REMIC for federal income tax purposes. The Class A certificates and Class B
certificates will constitute regular interests in the REMIC and generally will
be treated as debt instruments issued by the trust fund. The Class R
certificates will be the residual interest in the REMIC.
S-10
The Class A certificates will be treated as newly-originated debt instruments
for most federal income tax purposes. You must report income received on your
Class A certificates as it accrues from distribution date to distribution date,
which will be before the income for a distribution date is distributed in cash
to you.
See "Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus.
ERISA Considerations
The United States Department of Labor has granted to First Union Corporation,
the ultimate parent of First Union Securities, Inc., an administrative
exemption.
As long as certain conditions are satisfied, this exemption generally exempts
transactions relating to the purchase, sale and holding by certain employee
benefit plans of pass-through certificates underwritten by First Union
Securities, Inc., such as the Class A certificates, from:
. certain of the prohibited transaction provisions of ERISA, and
. the excise taxes imposed on the prohibited transactions by Section 4975
of the Internal Revenue Code.
If you are a fiduciary or other person acting on behalf of an employee
benefit plan or other retirement plan or arrangement subject to ERISA, or
Section 4975 of the Internal Revenue Code, or a governmental plan, as defined
in Section 3(32) of ERISA, subject to any federal, state or local law which is,
to a material extent, similar to the applicable provisions of ERISA or the
Internal Revenue Code, you should carefully review with your legal advisors
whether the purchase or holding of Class A certificates could give rise to a
transaction prohibited or not otherwise permissible under the rules of
regulations described in this paragraph.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment Considerations
The Class A certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the Class
A certificates. You should consult with your legal, tax and accounting advisors
for assistance in determining whether the Class A certificates constitute legal
investments for you.
See "Legal Investment" in this prospectus supplement and in the prospectus.
S-11
Certificate Ratings
It is a condition to the issuance of the Class A certificates that they be
rated " " by and " " by .
. A rating is not a recommendation to buy, sell or hold the Class A
certificates and may be subject to revision or withdrawal at any time by
the assigning rating organization.
. A rating does not address the possibility that, as a result of principal
prepayments, holders of a certificate may receive a lower than
anticipated yield.
See "Ratings" in this prospectus supplement.
S-12
RISK FACTORS
Before you make an investment decision, you should carefully consider the
following risks and the risk factors set forth in the accompanying prospectus
under "Risk Factors," which we believe describe all the principal factors that
make an investment in the offered certificates of this series speculative or
risky.
Limited Liquidity May Adversely Affect Your Ability to Resell Certificates
You may not be able to sell your Class A certificate or you may not be able
to sell your Class A certificate at a high enough price to produce your
anticipated return on investment because of limited liquidity. First Union
Securities, Inc. intends to make a market for purchase and sale of the Class A
certificates after their initial issuance, but has no obligation to do so.
There is no assurance that a secondary market will develop or, if a secondary
market does develop, that it will provide you with liquidity of investment or
that it will continue for the life of the Class A certificates.
The certificates will not be listed on any securities exchange.
Unpredictability of Prepayments May Adversely Affect Yield on Certificates
The rate of distributions of principal and the yield to maturity on your
certificates will be directly related to the rate of payments of principal on
the mortgage loans and the amount and timing of mortgagor defaults resulting in
realized losses. The rate of principal payments on the mortgage loans will be
affected by, among other things:
. the amortization schedules of the mortgage loans;
. the rate of principal prepayments, which includes partial prepayments
and those resulting from refinancing, by mortgagors;
. liquidations of defaulted mortgage loans;
. the presence and enforceability of due-on-sale clauses;
. repurchases of mortgage loans by the depositor as a result of
defective documentation or breaches of representations and warranties
and optional purchase by the depositor of defaulted mortgage loans;
and
. the optional purchase by the master servicer of all the mortgage loans
in connection with the termination of the trust fund.
See "Prepayment and Yield Considerations" and "Description of the
Certificates--Optional Termination" and "--Optional Purchase of Defaulted
Mortgage Loans" in this prospectus supplement and "The Pooling and Servicing
Agreement--Assignment of Mortgage Loans" and "--Termination; Optional
Termination" in the prospectus.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors.
. If prevailing rates for similar mortgage loans fall below the interest
rates on the mortgage loans, the rate of prepayment would generally be
expected to increase.
S-13
. Conversely, if interest rates on similar mortgage loans rise above the
interest rates on the mortgage loans, the rate of prepayment would
generally be expected to decrease.
The rate of prepayment on the mortgage loans may also be influenced by
programs offered by mortgage originators and servicers, including the master
servicer, on a general or targeted basis, to encourage refinancing. Any
solicited refinancings may result in a rate of prepayment that is higher than
you might otherwise expect.
If you are purchasing the Class A certificates at a discount, you should
consider the risk that if principal payments on the mortgage loans occur at a
rate slower than you expected, your yield may be lower than you expected.
If you are purchasing Class A certificates at a premium, you should consider
the risk that if principal payments on the mortgage loans occur at a rate
faster than you expected, your yield may be lower than you expected.
See "Prepayment and Yield Considerations" in this prospectus supplement.
Book-Entry System May Limit Rights of Beneficial Owners
The Class A certificates will be held through the book-entry system of DTC
and transactions in the Class A certificates generally can be effected only
through DTC and DTC participants. As a result:
. your ability to pledge Class A certificates to entities that do not
participate in the DTC system, or to otherwise act with respect to
Class A certificates, may be limited because you will not have a
physical certificate; and
. under a book-entry format, you may experience delays in the receipt of
payments, since distributions will be made by the trustee to DTC, and
not directly to you.
For a more detailed discussion of book-entry certificates, see "Description
of the Certificates--Miscellaneous" in this prospectus supplement.
Limited Nature of Certificate Ratings
The ratings of the Class A certificates depend primarily on an assessment by
the rating agencies of the underlying mortgage loans and the certificate
insurance policy. The rating of the Class A certificates
. is not a recommendation to purchase, hold or sell the Class A
certificates; and
. does not comment as to the market price or suitability of the Class A
certificates for a particular investor.
There is no assurance that the ratings will remain for any given period of
time or that the ratings will not be reduced, suspended or withdrawn by the
rating agencies.
S-14
Delays and Expenses Associated With Legal Actions May Delay Distributions on
Certificates
If a borrower defaults, the master servicer may have trouble foreclosing on a
mortgage loan or obtaining a deficiency judgment because foreclosure actions
and actions to obtain deficiency judgments:
. are regulated by state laws and judicial rules;
. may be subject to delays; and
. may be expensive.
If the certificate insurer does not make a required payment or if the Class B
certificates are no longer outstanding, a delay or inability of the master
servicer to foreclose or obtain a deficiency judgment may delay distributions
on your Class A certificates or result in a loss on your Class A certificates.
Risk of Loss is Greater on Second Lien Mortgage Loans
Approximately % of the mortgage loans, by aggregate outstanding principal
balance as of the cut-off date, are secured by second liens on the related
mortgaged properties. Mortgage loans secured by second mortgages will be
entitled to proceeds that remain from the sale of the related mortgaged
property:
. after any related senior mortgage loans and prior statutory liens have
been satisfied; and
. if any senior liens were satisfied by the master servicer, after the
master servicer has been reimbursed.
If the proceeds are insufficient to satisfy the loans and prior liens in the
aggregate and the certificate insurer is unable to perform its obligations
under the certificate insurance policy, your Class A certificates may bear the
risk of:
. delay in distributions while a deficiency judgment against the
borrower is obtained and
. loss if the deficiency judgement is not obtained or enforceable.
See "Risk Factors--Increased Risk of Losses on Foreclosure of Junior Mortgage
Loans" in the prospectus. In addition, the rate of default of second mortgage
loans may be greater than that of mortgage loans secured by first liens on
comparable properties.
Geographic Concentration May Increase Risk of Loss and Delinquency
At various times, certain geographic regions will experience weaker economic
conditions and housing markets and consequently will experience higher rates of
delinquency and loss on mortgage loans generally. In addition, California,
Florida and several other regions have experienced natural disasters, including
earthquakes, fires, floods
S-15
and hurricanes, which may adversely affect property values. See the chart on
page S-21 for a listing of the locations and concentrations of mortgaged
properties.
Any deterioration in housing prices in the states where there is a
significant concentration of mortgaged properties, as well as the other states
where the mortgaged properties are located, and any deterioration of economic
conditions in those states, may adversely affect the ability of borrowers to
make payments on the mortgage loans and may increase the likelihood of losses
on those mortgage loans. If these losses occur, they may have an adverse effect
on the yield to maturity of the Class A certificates.
Consumer Protection Laws May Limit Remedies
There are various federal and state laws, public policies and principles of
equity that protect consumers.
Among other things, these laws, policies and principles:
. regulate interest rates and other charges;
. require certain disclosures;
. require licensing of mortgage loan originators;
. prohibit discriminatory lending practices;
. prohibit unfair and deceptive practices;
. regulate the use of consumer credit information; and
. regulate debt collection practices.
Violations of certain provisions of these laws may limit the ability of the
master servicer to collect all or part of the principal of, or interest on, the
mortgage loans, may entitle the mortgagor to a refund of amounts previously
paid and may subject the depositor, the master servicer or the trust fund to
damages and administrative enforcement. The depositor will be required to
repurchase any mortgage loans which, at the time of origination, did not comply
with the federal laws or regulations. See "Certain Legal Aspects of the
Mortgage Loans" in the prospectus.
Year 2000 Readiness Disclosure
The depositor is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000 problem" is pervasive and complex. Virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data, fail or cause another
system to fail.
S-16
The master servicer and the trustee have advised the depositor that they are
committed to either:
. implementing modifications to their respective existing systems to the
extent required to cause them to be year 2000 compliant; or
. acquiring computer systems that are year 2000 compliant, in each case
prior to January 1, 2000.
However, neither the depositor nor any affiliate of the depositor has made
any independent investigation of the computer systems of the trustee. If
computer problems arise out of a failure of the efforts to be completed on
time, or if the computer systems of the trustee or the master servicer are not
fully year 2000 compliant, the resulting disruptions in the collection or
distribution of receipts on the mortgage loans could materially adversely
affect your certificates.
DTC has informed members of the financial community that it has developed and
is implementing a program so that its systems, as the same relate to the timely
payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the financial community that it is contacting,
and will continue to contact, third party vendors from whom DTC acquires
services to:
. impress upon them the importance of these services being year 2000
compliant; and
. determine the extent of their efforts for year 2000 remediation and,
as appropriate, testing, of their services.
In addition, DTC is in the process of developing contingency plans as it
deems appropriate.
According to DTC, the information with respect to DTC has been provided to
the financial community for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
In the event that computer problems arise out of a failure of the efforts
described above to be completed on time, or in the event that the systems of
the trustee, the master servicer or DTC are not fully year 2000 compliant, any
resulting disruptions in the collection and distribution of receipts on, or in
respect of, the mortgage loans could materially adversely affect your
certificates.
S-17
See "Risk Factors" in the prospectus for a description of certain other risks
and special considerations applicable to the Class A certificates.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. Forward-looking statements, together with related qualifying
language and assumptions, are found in the material, including each of the
tables, set forth under "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found elsewhere in this
prospectus supplement and the prospectus, and may be identified by, among other
things, accompanying language including the words "expects," "intends,"
"anticipates," "estimates," or analogous expressions, or by qualifying language
or assumptions. Those statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from those forward-looking statements. Those risks,
uncertainties and other factors include, among others, general economic and
business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with government regulations,
customer preference and various other matters, many of which are beyond the
depositor's control. These forward-looking statements speak only as of the date
of this prospectus supplement. The depositor will not update or revise any
forward-looking statements to reflect any change in the depositor's
expectations with regard to the subject of those statements or any change in
events, conditions or circumstances on which those statements are based.
DEFINED TERMS
We define and use capitalized terms in this prospectus supplement and the
prospectus to assist you in understanding the terms of the offered
certificates. We define the capitalized terms we use in this prospectus
supplement under the caption "Glossary of Terms" beginning on page S- in this
prospectus supplement. We define capitalized terms we use in the accompanying
prospectus under the caption "Glossary of Terms" beginning on page in the
prospectus.
THE MORTGAGE POOL
Mortgage Loan Characteristics
The mortgage pool with respect to the certificates will consist of
approximately conventional mortgage loans evidenced by fixed-rate promissory
notes having an aggregate principal balance as of the cut-off date of
approximately $ . The mortgage notes are secured by mortgages or deeds of
trust or other similar security instruments creating first liens or second
liens on Mortgaged Properties.
S-18
The Mortgaged Properties will consist of detached individual dwelling units,
individual condominiums, townhouses, duplexes, individual units in planned unit
developments and other attached dwelling units. Based upon representations
obtained from the mortgagors at the time of origination of the mortgage loans,
approximately %, determined by Cut-off Date Principal Balance, of the related
Mortgaged Properties are owner-occupied. At the cut-off date, none of the
mortgage loans will be delinquent more than 30 days. The trust fund will
include, in addition to the mortgage pool:
. the amounts held from time to time in the Collection Account;
. the amounts held from time to time in the Distribution Account;
. any property which initially secured a mortgage loan and which is
acquired by foreclosure or deed in lieu of foreclosure;
. all insurance policies and the proceeds of those policies;
. any right to require the depositor to repurchase or substitute for the
mortgage loans on account of certain breaches of representation and
warranty as set forth in the pooling and servicing agreement;
. the Reserve Fund; and
. the Certificate Insurance Policy and its proceeds.
JVMC will sell the mortgage loans to the depositor on the closing date under
a mortgage loan purchase agreement between JVMC and the depositor. JVMC will
have acquired the mortgage loans from one or more originators or sellers that
may be affiliates of the depositor or of the partners of the depositor.
The depositor will assign the mortgage loans purchased under the mortgage
loan purchase agreement to the trustee. The master servicer will service the
mortgage loans under the pooling and servicing agreement.
The depositor will make the representations and warranties to the trustee
with respect to the mortgage loans as described in the prospectus under
"Mortgage Loan Program--Representations and Warranties; Repurchases." The
depositor will have a responsibility to repurchase a mortgage loan as to which
there is a breach of the representations and warranties that materially and
adversely affect the value of that mortgage loan and is not timely cured. The
only remedy available to certificateholders for a breach of these
representations and warranties will be this repurchase obligation of the
depositor. The trustee will enforce the depositor's repurchase obligation. In
lieu of the repurchase obligation, the depositor may, within two years after
the date of initial delivery of the certificates, substitute for the affected
mortgage loan a substitute mortgage loan, as described under "Mortgage Loan
Program--Representations and Warranties; Repurchases" in the prospectus. The
mortgage loan purchase agreement will provide the depositor with remedies
against JVMC for breaches of representations and warranties made by the
depositor with respect to the mortgage loans in the pooling and servicing
agreement and for the failure to deliver documentation with respect to the
mortgage loans under the pooling and servicing agreement.
S-19
Certain data with respect to the mortgage loans is set forth below.
References herein to percentages of mortgage loans refer in each case to the
percentage of the Cut-off Date Principal Balance of the mortgage loans.
. The mortgage loans were originated between , 199 , and ,
199 .
. No more than % of the Mortgaged Properties securing the mortgage
loans are located in any one zip code area.
. At origination, all of the mortgage loans had terms to stated maturity
of to years.
. The latest month and year in which any mortgage loan matures is
202 .
. The mortgage loans had remaining terms to stated maturity, calculated
as of the cut-off date, of between approximately and months and a
weighted average remaining term to stated maturity, as of the cut-off
date, of approximately months.
. The Mortgage Rates, as of the cut-off date, ranged from % per annum
to % per annum and the weighted average Mortgage Rate, as of the cut-
off date, was approximately % per annum.
. Each mortgage loan had an original principal balance of not less than
$ nor more than $ .
. The average outstanding principal balance of the mortgage loans, as of
the cut-off date, was approximately $ .
. The weighted average loan-to value ratio at origination was
approximately %.
The loan-to-value ratio of a mortgage loan is calculated by dividing the
original principal balance of the mortgage loan by the lesser of the appraised
value of the Mortgaged Property at the time the mortgage loan was originated or
the sales price of the property. However, if the mortgage loan involves a
refinancing of the mortgaged property then the loan-to-value ratio is the
original principal balance of the mortgage loan divided by the appraised value.
S-20
Set forth below is a description of certain additional characteristics of the
mortgage loans.
Geographical Distribution of Mortgaged Properties
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
State or Territory Loans Balance Balance
------------------ -------- --------- --------------
.......................................... $ %
..........................................
..........................................
..........................................
..........................................
Other states and/or territories...............
---- ---- ---
Total....................................... $ %
==== ==== ===
The category "other states and/or territories" includes those states and
territories with under % concentrations individually.
Range of Cut-off Date Principal Balances
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Range of Cut-off Date Mortgage Principal Principal
Principal Balances Loans Balance Balance
--------------------- -------- --------- --------------
$ 0.01--$ 25,000.00 ................. $ %
$ 25,000.01--$ 50,000.00..................
$ 50,000.01--$ 75,000.00..................
$ 75,000.01--$ 100,000.00..................
$ 100,000.01--$ 200,000.00..................
$ 200,000.01--$ 300,000.00..................
$ 300,000.01--$ 400,000.00..................
$ 400,000.01--$ 500,000.00..................
$ 500,000.01--$ 600,000.00..................
$ 600,000.01--$ 700,000.00..................
$ 700,000.01--$ 800,000.00..................
$ 800,000.01--$ 900,000.00..................
$ 900,000.01--$1,000,000.00..................
$1,000,000.01--$1,500,000.00..................
$1,500,000.01--$2,000,000.00..................
$2,000,000.00--$2,500,000.00..................
$2,500,000.01--$3,000,000.00..................
$3,000,000.00--$3,500,000.00..................
$3,500,000.00--$4,000,000.00..................
--- ---- ---
Total....................................... $ %
=== ==== ===
S-21
Range of Original Loan-to-Value Ratios
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Range of Original Mortgage Principal Principal
Loan-to-Value Ratios Loans Balance Balance
- -------------------- -------- --------- --------------
0.01% - 50.00%................................ $ %
..........................................
..........................................
..........................................
..........................................
..........................................
95.01% - 99.99%...............................
100%..........................................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
Occupancy Status
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Status Loans Balance Balance
- ------ -------- --------- --------------
Owner-Occupied................................ $ %
Second Home...................................
Investor......................................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
Loan Purpose
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Loan Purpose Loans Balance Balance
- ------------ -------- --------- --------------
Purchase...................................... $ %
Rate and Term Refinance.......................
Equity Take-out...............................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
Mortgaged Properties
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Property Type Loans Balance Balance
- ------------- -------- --------- --------------
Single Family............................... $ %
De minimus Planned Unit Development
Condominium................................
Planned Unit Development....................
2-4 Family Residence........................
----- -------- ------
Total..................................... $ 100.00%
===== ======== ======
S-22
Range of Mortgage Rates
Percent of
Mortgage Loans
Range of Number Cut-off by Cut-
Current of Date off Date
Mortgage Mortgage Principal Principal
Rates Loans Balance Balance
-------- -------- --------- --------------
6.50% - 6.74%................................ $ %
6.75% - 6.99%................................
7.00% - 7.24%................................
7.75% - 7.99%................................
8.00% - 8.24%................................
8.25% - 8.49%................................
8.50% - 8.74%................................
9.00% - 9.24%................................
9.25% - 9.49%................................
9.50% - 9.74%................................
9.75% - 9.99%................................
--- ---- ------
Total...................................... $ 100.00%
=== ==== ======
Range of Remaining Terms to Stated Maturity
Percent of
Mortgage Loans
Remaining Number Cut-off by Cut-
Terms to of Date off Date
Stated Mortgage Principal Principal
Maturity Loans Balance Balance
--------- -------- --------- --------------
169 - 180 months............................. $ %
253 - 264 months.............................
265 - 276 months.............................
277 - 288 months.............................
289 - 300 months.............................
--- ---- ------
Total...................................... $ 100.00%
=== ==== ======
Underwriting
[All of the mortgage loans were underwritten in accordance with the
underwriting standards set forth under "Mortgage Loan Program--Underwriting
Standards" in the prospectus.] [Describe any material elements of underwriting
criteria for the mortgage loans which vary from the underwriting standards in
the prospectus.]
The following table sets forth the distribution of the mortgage loans among
the credit grades assigned by JVMC under the underwriting standards, as of the
date of their origination. Grade A refers collectively to the Grade A and Grade
A- credit grades, Grade B refers collectively to the Grade B and Grade B-
credit grades and Grade C refers collectively to the Grade C and Grade C-
credit grades.
Percent of Mortgage
Number of Loans by Cut-off Date
Company Credit Grade Loans Principal Balance Principal Balance
-------------------- --------- ----------------- ---------------------
Grade A....................... $ %
Grade B.......................
Grade C.......................
--- ----- ---
Total..................... $ %
=== ===== ===
S-23
DELINQUENCY AND LOAN LOSS EXPERIENCE OF MASTER SERVICER
The following tables set forth the delinquency, foreclosure and loan loss
experience of residential mortgage loans acquired by JVMC and serviced by HFC.
Since all of the mortgage loans in the JVMC Portfolio were acquired by JVMC on
or after 1998, the foreclosure and loss delinquency information shown in
these tables may be distorted to some degree. It is likely that the delinquency
and foreclosure experience with respect to the mortgage loans will differ from
that reflected in the tables. Likewise, it is likely that any losses
experienced on liquidation of defalted mortgage loans will occur at different
rates than those shown below. In particular, losses on loans which are
delinquent or in foreclosure for a longer period prior to liquidation may be
larger as a result of higher amounts of accrued interest, property maintenance
expenses and other expenses of liquidation. The actual loss and delinquency
experience on the mortgage loans will depend, among other things, upon the
value of the real estate securing the mortgage loans and the ability of
borrowers to make required payments.
The tables reflect rapid growth in recent periods in the JVMC Portfolio as a
result of an increasing volume of new loan acquisitions. Delinquencies,
foreclosures and loan losses generally are expected to occur more frequently
after the first full year of the life of the mortgage loans. Accordingly,
because a large number of mortgage loans have been originated recently, the
current level of delinquencies, foreclosures and loan losses may not be
representative of the levels which may be experienced over the lives of these
mortgage loans. If the size of the JVMC Portfolio does not continue to grow at
the current rate, the levels of delinquencies, foreclosures and loan losses as
percentages of the mortgage loans in the JVMC Portfolio could rise
significantly above the rates indicated in the following tables.
The following table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. No
mortgage loan is included in the following table as delinquent until it is at
least 30 days past due. In the following table all dollar amounts are in
millions and the entries may not add up to the total due to rounding.
Loan Delinquency and Foreclosure Experience
Number of Principal Number of Principal Number of Principal Number of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
--------- --------- --------- --------- --------- --------- --------- ---------
As of As of December 31, As of As of
December 31, 19 19 December 31, 19 June 30, 19
------------------- ------------------- ------------------- -------------------
Loans outstanding............ $ $ $ $ $ $
30-59 days.................
60-89 days.................
90 days or more............
---- ----- ---- ----- ----- ----- ----- -----
Total delinquencies.......... $ $ $ $ $ $
==== ===== ==== ===== ===== ===== ===== =====
Delinquencies as a percent of
number of mortgage loans and
principal amount
outstanding................. %
Foreclosures/bankruptcies..
Foreclosures as a percentage
of number of mortgage loans
and principal amount
outstanding................. %
S-24
The following table presents, for the JVMC Portfolio, the net losses on the
disposition of properties acquired in foreclosure or by deed-in-lieu of
foreclosure during the periods indicated. For the purposes of the following
table, net losses are defined as proceeds from sale less outstanding principal
balance less certain capitalized costs related to disposition of the related
property, including accrued interest.
Loan Loss Experience
Fiscal Year Ended Six Month Period
December 31, Ended June 30,
------------------- ----------------
19 19 19 19
----- ----- ----- ----------------
Average principal balance outstanding... $ $ $ $
Net losses.............................. $( ) $( ) $( ) $( )
Net losses as a percent of average
principal balance outstanding.......... % % % %
No assurance can be given that values of the Mortgaged Properties as of the
dates of origination of the related mortgage loans have remained or will remain
constant. In certain regions of the country, including regions in which
Mortgaged Properties are located, real estate values have recently declined. If
the residential real estate market should experience an overall decline in
property values large enough to cause the outstanding balances of the mortgage
loans to equal or exceed the value of the Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions, which may or may not affect real property values,
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage pool. To
the extent that the losses are not covered by the subordination feature
described under "Description of the Certificates--Subordinated Certificates" or
the Reserve Fund, subject to the effect of the Certificate Insurance Policy as
described in this prospectus supplement under "Description of the
Certificates--Distributions on the Certificates," they will be borne by holders
of the related Class A certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A certificates, the aggregate
amount of each interest payment on the Class A certificates and the yields to
maturity of the Class A certificates are related to and affected by the rate
and timing of payments of principal on the underlying mortgage loans. The
principal payments on the mortgage loans may be in the form of scheduled
principal payments or prepayments, repurchases or liquidation proceeds due to
default, casualty, condemnation and the like. Any of these payments will result
in distributions to the certificateholders of amounts attributable to principal
which would otherwise be distributed over the remaining term of the mortgage
loans. In addition, because the Class A certificates will be entitled to
receive all or a disproportionate percentage of unscheduled principal payments
on the mortgage loans, including liquidations due to default, on each
Distribution Date until the Class A Certificate Balance is reduced to zero,
rather than the
S-25
portion proportionate to their interest in the mortgage loans, the rate of
principal payments on the mortgage loans will, unless offset by cash flow
insufficiencies due to delinquencies and liquidation losses, have a greater
effect on the rate of principal payments and the amount of interest payments
on, and the yields to maturity of, the Class A certificates than if the Class A
certificates were entitled only to their proportionate interest in the Formula
Principal Distribution Amounts for the mortgage loans. See "Description of the
Certificates--Distributions on the Certificates." In general, the prepayment
rate may be influenced by a number of factors, including general economic
conditions, homeowner mobility and the level of mortgage market interest rates.
Mortgagors are permitted to prepay the mortgage loans, in whole or in part, at
any time without penalty. The rate of payment of principal may also be affected
by any repurchase of the mortgage loans by the master servicer. See "The
Mortgage Pool" and "Description of the Certificates--Optional Termination" in
this prospectus supplement. In this event, the repurchase price will be passed
through to the applicable certificateholders as a prepayment of principal in
the month following the month of the repurchase.
Mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, mortgage loans could be subject to higher prepayment rates
than if prevailing interest rates remain constant. No prediction can be made as
to the rate of prepayments on the mortgage loans in stable or changing interest
rate environments.
In the case of Class A certificates purchased at a discount to their original
principal amounts, a slower than anticipated rate of principal payments is
likely to result in a lower than anticipated yield. In the case of Class A
certificates purchased at a premium to their original principal amounts, a
faster than anticipated rate of principal payments is likely to result in a
lower than anticipated yield.
In the event of the acceleration of mortgage loans as a result of enforcement
of "due-on-sale" provisions in connection with transfers of the related
Mortgaged Properties, the level of prepayments on the mortgage loans will be
affected, thereby shortening the weighted average life of the Class A
certificates. See "Yield and Prepayment Considerations" in the prospectus.
If a mortgage loan is prepaid in full, interest thereon will cease to accrue
on the date of the prepayment. Consequently, the timing of prepayments in full
on mortgage loans will affect the amount of the Available Distribution Amount
available to make distributions of interest on the certificates and will
therefore affect the ability of the trust fund to make a full distribution of
interest on the Class A certificates and the Formula Principal Distribution
Amount. The Master Servicing Fee in respect of the month of prepayment will be
applied to make up for any reduced amount of interest collections on account of
the timing of the receipt of principal prepayments, but no assurance can be
given that the amount of the Master Servicing Fee will be sufficient for this
purpose. Net Interest Shortfalls will be borne by the certificateholders as
described in this prospectus supplement under "Description of the
Certificates--Distributions on the Certificates" and will result in a lower
than anticipated yield.
S-26
Weighted Average Life of the Class A Certificates
The following information is given solely to illustrate the effect of
prepayments of the mortgage loans on the weighted average life of the Class A
certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the mortgage loans.
The weighted average lives of the Class A certificates will be affected by
the rate at which principal on the mortgage loans is paid. Principal payments
on mortgage loans may be in the form of scheduled amortization or prepayments.
For the purposes of the discussion of weighted average lives, the term
"prepayment" includes prepayments and liquidations due to default or other
dispositions of mortgage loans.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement, the SPA,
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of new mortgage loans. A prepayment
assumption of 100% SPA assumes
. a constant prepayment rate of 0.2% per annum of the then outstanding
principal balance of the mortgage loans in the first month of the life
of the mortgage loans;
. an additional 0.2% per annum in each month thereafter until the
thirtieth month; and
. a constant prepayment rate of 6% per annum each month for the
thirtieth month and each month thereafter.
As used in the table on page S- . "0% SPA" assumes prepayment rates equal
to 0% of SPA, i.e., no prepayments. Correspondingly, " % SPA" assumes
prepayment rates equal to % of SPA, and so forth. SPA does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans in the trust fund.
The following characteristics of the mortgage loans were assumed in preparing
the table on page S- . The dollar amounts are approximate.
Remaining Term Original Term
Principal to Maturity to Maturity
Balance Mortgage Rate (in months) (in months)
- --------- ------------- -------------- -------------
----- ----- -----
===== ===== =====
S-27
In addition, the following characteristics of the mortgage loans were assumed
in preparing the following table:
. all calculations for the mortgage loans are done on the basis of a
360-day year consisting of twelve 30-day months;
. with respect to the Class A certificates, all weighted average lives
are calculated on the basis of a 360-day year and a 30-day month;
. due dates on each mortgage loan are the first day of the month;
. all scheduled monthly payments on the mortgage loans are made in a
timely fashion on the first day of each month, commencing in , and
prepayments are assumed to be received on the last day of each month,
commencing in ;
. distributions on the Class A certificates are made on the [25th] day
of each month, commencing in ;
. the closing date is ;
. the mortgage loans will prepay at the indicated assumed percentages of
SPA; and
. with regard to the weighted average lives, the master servicer does
not exercise its option to terminate the trust fund.
Based upon these assumptions, certain of which may not reflect actual
experience, the following table indicates the projected weighted average life
of the Class A certificates and the percentages of the initial Class A
Certificate Balance of the Class A certificates that would be outstanding after
each of the dates shown at various percentages of SPA.
The weighted average life of a Class A certificate shown in the following
table is determined by:
. multiplying the amount of each distribution in reduction of the
certificate balance by the number of years from the date of issuance
of the certificate to the related distribution date,
. adding the results and
. dividing the sum by the initial certificate balance of the Class A
certificate.
S-28
Percentage of Initial Certificate Balance
Outstanding at the Following Percentages of SPA
Class A Certificates
Distribution Date % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
Weighted Average Lives in Years.................
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued under the pooling and servicing agreement
among the depositor, the master servicer and the trustee. A copy of the pooling
and servicing agreement, not including the list of mortgage loans, will be
attached as an exhibit to the Current Report on Form 8-K to be filed with the
Securities and Exchange Commission after the date of delivery of the
certificates. Reference is made to the prospectus for additional information
regarding the terms and conditions of the pooling and servicing agreement to
the extent not revised by the following description. To the extent that the
statements in this prospectus supplement modify statements in the prospectus,
the statements in this prospectus supplement control.
The following summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the pooling
and servicing agreement. When particular provisions or terms used in the
pooling and servicing agreement are referred to, the actual provisions,
including definitions of terms, are incorporated by reference.
General
Exclusive of the interest of the Class R certificates, the Class A
certificates will initially evidence in the aggregate a beneficial interest of
approximately % in the pool of mortgage loans, and the Class B certificates
will initially evidence the remaining approximate %. The Class R certificates
do not have a principal balance. The pass-through rate for the Class A and
Class B certificates will be the percentage set forth on page S-4 of this
prospectus supplement.
The Class A certificates will be issued in fully registered form only, in
denominations of $ and integral multiples of $ in excess of $ . The
Percentage Interest of a Class A certificate is the percentage obtained from
dividing its denomination by the
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original Class A Certificate Balance. Definitive certificates, if issued, will
be transferable and exchangeable at the corporate trust office of the trustee
at its Corporate Trust Department in [ ] or, if it so elects, at the office
of an agent in New York City. No service charge will be made for any
registration of exchange or transfer, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
Distributions of principal and interest on the Class A certificates will be
made on each Distribution Date beginning in 19 , to the persons in whose
names the Class A certificates are registered at the close of business on the
Record Date. The Class A certificates will initially be represented by
certificates registered in the name of Cede & Co. as the nominee of DTC. See
"--Miscellaneous" below. If Definitive certificates are issued, distributions
will be made by check mailed to the address of the person entitled to the
distribution as it appears on the certificate register, except that a
certificateholder who holds Class A certificates with original denominations
aggregating at least $5 million may request payment by wire transfer of funds
by written instructions delivered to the trustee at least ten business days
prior to the Record Date. The final distribution in retirement of Class A
certificates will be made only upon presentation and surrender of the Class A
certificates at the office or agency of the trustee specified in the final
distribution notice to Class A certificateholders.
The Collection Account will be established by the master servicer in the name
of and on behalf of the trustee.
Distributions on the Certificates
Distributions of interest and principal to each holder of a Class A
certificate will be made on each Distribution Date, commencing in 19 , in
an amount equal to each holder's respective Percentage Interest multiplied by
the amount distributed in respect of Class A certificates. Certain calculations
with respect to the certificates will be made by the master servicer on the
Determination Date. Distributions on the Class A certificates will be applied
first to interest and then to principal. All calculations of interest on the
certificates will be made on the basis of a 360-day year consisting of twelve
30-day months. Interest will accrue with respect to each Distribution Date
during each Accrual Period.
On each Distribution Date the Available Distribution Amount will be deposited
into the Distribution Account. In addition, on or before each Distribution
Date, the trustee will deposit into the Distribution Account, for distribution
on the Distribution Date:
. the payments, if any, it has received under the Certificate Insurance
Policy and
. any Reserve Fund draw amounts.
On each Distribution Date the Available Distribution Amount will be
distributed in accordance with the amounts and order of priority described in
the definition of Available Distribution Amount Allocation.
The interest entitlement for the Class A and Class B certificates with
respect to each Distribution Date will be reduced by the amount of Net Interest
Shortfall allocable to each
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class. The Net Interest Shortfall on any Distribution Date will be allocated
pro rata among the Class A and Class B certificates based on the amount of
interest each class of certificates would otherwise be entitled to receive on
the Distribution Date.
In no event will the aggregate distributions of principal to the holders of
the Class A or Class B certificates, whether out of Available Distribution
Amounts, Reserve Fund draw amounts or payments under the Certificate Insurance
Policy, exceed the initial Certificate Balance of the class.
In order for the reductions described in the definition of Class A Prepayment
Percentage to be applicable with respect to any Distribution Date:
. cumulative Realized Principal Losses with respect to the mortgage
loans will not exceed % of the initial Class B Certificate Balance,
and
. the average aggregate outstanding principal balance on the
Distribution Date and for the preceding five Distribution Dates on the
mortgage loans delinquent 60 days or more, including for this purpose
any mortgage loans in foreclosure and mortgage loans with respect to
which the related Mortgage Property has been acquired by the trust
fund, will not exceed % of the then-outstanding Certificate Balance
of the Class B certificates.
There will be a Reserve Fund established with the trustee. The Reserve Fund
will initially be funded up to $ from the application in the aggregate of
deposits under clause (5) of the definition of Available Distribution Amount
Allocation. On each Distribution Date, funds, if any, in the Reserve Fund will
be applied in the following order of priority:
. first, to make any required Advance that the master servicer fails to
make,
. second, to distribute any shortfall in the amount required to be
distributed to the Class A certificateholders on the Distribution
Date,
. third, to pay to the Certificate Insurer the premium on the
Certificate Insurance Policy for the Distribution Date to the extent
not paid under "Description of the Certificates--Distributions on the
Certificates" and
. fourth, to pay to the Certificate Insurer any Unreimbursed Insurer
Amounts for the Distribution Date to the extent not paid under
"Description of the Certificates--Distributions on the Certificates".
Collections of late Monthly Payments covered by any Advance from the Reserve
Fund will be applied to reinstate the amount in the Reserve Fund up to $ .
Similarly, the application of deposits under clause (5) of the definition of
Available Distribution Amount Allocation may reinstate the amount in the
Reserve Fund up to $ . If the amount available in the Reserve Fund on a
Distribution Date is not sufficient to pay the entire amount of shortfalls
referred to in clauses first and second above, the amount of the deficiency
shall be allocated pro rata among the Class A certificates on the basis of
their respective Certificate Balances prior to that Distribution Date.
Notwithstanding the statements above, the aggregate amount distributed from the
Reserve Fund under clause first above over the life of the trust fund shall not
exceed $ . If an aggregate of $
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has been applied under clause first above, then the Reserve Fund may be
reinstated one time up to $ from the application of deposits under clause
(5) of the definition of Available Distribution Amount Allocation, and funds,
if any, in the Reserve Fund may thereafter be applied only in accordance with
clause first above.
Subordinated Certificates
The rights of the Class B certificateholders and the Class R
certificateholders to receive distributions with respect to the mortgage loans
will be subordinated to the rights of the holders of Class A certificates to
the extent described in this prospectus supplement. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A certificates of the full amount of monthly distributions due them and
to protect the holders of the Class A certificates against losses.
The protection afforded to the holders of the Class A certificates by means
of the subordination of the Class B and Class R certificates as described above
will be accomplished:
. by the application of the Available Distribution Amount in the order
specified under "--Distributions on the Certificates" above and
. if the Available Distribution Amount on the Distribution Date is not
sufficient to permit the distribution of the entire Class A Formula
Principal Distribution Amount and all previously undistributed
Unrecovered Principal Amounts to the holders of Class A certificates,
by the right of the holders of the Class A certificates to receive any
such shortfall out of future distributions of Available Distribution
Amounts that would otherwise have been payable to the holders of the
related Class B certificates and the Class R certificates, as
applicable.
This subordination feature is effected for the Class A certificates by
allocating principal among the certificates on a shifting-interest payment
basis as described herein.
As described above, the distribution of principal to the holders of Class A
certificates is intended to include the principal balance of each mortgage loan
that became a Liquidated Mortgage Loan during the related Principal Prepayment
Period. If the Liquidation Proceeds, net of related Liquidation Expenses and
any Advances in respect of Liquidation Proceeds, from a Liquidated Mortgage
Loan are less than the principal balance of that Liquidated Mortgage Loan, the
deficiency may, in effect, be absorbed by the holders of the Class B
certificates. This is due to the fact that a portion of future Available
Distribution Amounts funded by future principal collections on the mortgage
loans, up to the aggregate amount of the deficiencies, that would otherwise
have been distributable to them may be paid to the holders of the Class A
certificates or to the Certificate Insurer. No assurance can be given that the
Class A certificates will not experience any losses.
If, due to losses and delinquencies, the Available Distribution Amount for
any Distribution Date is not sufficient to cover, in addition to interest
distributable to the holders of the Class A certificates, the entire Formula
Principal Distribution Amount and any
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Unrecovered Principal Amounts distributable to the holders of the Class A
certificates on the Distribution Date, then the aggregate of the Pool Scheduled
Principal Balance will have become less than the outstanding Certificate
Balance of the certificates. The disproportionate reduction reduces the
protection afforded by the subordination of the Class B certificates.
Consequently, but for the effect of the Certificate Insurance Policy, the
holders of Class A certificates will bear all losses and delinquencies on the
mortgage loans, and could incur losses on their investment, if the Pool
Scheduled Principal Balance becomes equal to or less than the aggregate
outstanding Certificate Balance of the Class A certificates.
Certificate Insurance Policy
The depositor will obtain the Certificate Insurance Policy, which will
provide for payment of Insured Amounts solely for the benefit of the holders of
the Class A certificates. The Certificate Insurance Policy is non-cancelable.
See "The Certificate Insurance Policy and the Certificate Insurer" in this
prospectus supplement.
The Certificate Insurer is required to pay Insured Amounts to the trustee, as
paying agent, on the later of the applicable Distribution Date or the business
day next following the business day on which the Certificate Insurer receives a
notice of Nonpayment, in accordance with and subject to the terms of the
Certificate Insurance Policy. The Certificate Insurer is not responsible for
the application of any Insured Amount subsequent to the receipt of those
amounts by the trustee.
The Certificate Insurance Policy does not cover shortfalls, if any,
attributable to the liability of the trust fund, the REMIC or the trustee for
withholding taxes, if any, including interest and penalties in respect of this
type of liability. In addition, the Certificate Insurance Policy does not
protect against the adverse consequences of, and does not guarantee, any
specified rate of prepayments nor protect against any risk other than
Nonpayment, including failure of the trustee to make any Insured Payment due to
holders of the Class A certificates. In addition, the Certificate Insurance
Policy does not cover any Net Interest Shortfalls in respect of the Class A
certificates.
Master Servicing Compensation and Payment of Expenses
The master servicer will be paid a monthly Master Servicing Fee with respect
to each mortgage loan. The master servicer will not receive excess interest or
excess proceeds as additional servicing compensation. See "Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
The master servicer is obligated to pay certain ongoing expenses associated
with the mortgage pool and incurred by the master servicer in connection with
its responsibilities under the pooling and servicing agreement. See "The
Pooling and Servicing Agreement--Servicing and Other Compensation and Payment
of Expenses" in the prospectus for
S-33
information regarding other possible compensation to the master servicer and
for information regarding expenses payable by the master servicer.
The Master Servicing Fee in respect of a month will be applied to make up any
Prepayment Interest Shortfall experienced on any prepayment of a mortgage loan
in that month in respect of which less than one month's interest is collected
in respect of that month. See "Prepayment and Yield Considerations" in this
prospectus supplement. No assurance can be given that the amount of the Master
Servicing Fee will be sufficient for that purpose.
Optional Purchase of Defaulted Mortgage Loans
The depositor may, in its sole discretion, purchase from the trust fund:
. any defaulted mortgage loan or any mortgage loan as to which default
is reasonably foreseeable and
. any mortgage loan as to which the originator has breached a
representation or warranty to JVMC regarding the characteristic of
that mortgage loan.
Any purchase by the depositor will be at a price equal to 100% of the
Principal Balance of the mortgage loan, plus any unreimbursed Advances in
respect of the mortgage loan, together with accrued interest at the Mortgage
Rate from the date through which interest was last paid by the related borrower
or advanced by the servicer to the end of the Principal Prepayment Period
preceding the Distribution Date on which the proceeds of the purchase are
required to be distributed.
Advances
The master servicer is obligated to make Advances of cash each month, which
will be part of the Available Distribution Amount, equal to the amount of the
delinquent Monthly Payments due on the immediately preceding due date and not
paid. The master servicer is under no obligation to make an Advance with
respect to any mortgage loan if the master servicer determines, in its sole
discretion, that the Advance will not be recoverable from future payments and
collections on the mortgage loans based upon its general experience in
servicing mortgage loans, its assessment of the likelihood of ultimate payment
by the related mortgagors and its estimate of Liquidation Proceeds. The master
servicer will be reimbursed for Non-recoverable Advances from funds in the
Collection Account. Advances are intended to maintain a regular flow of
scheduled interest payments to the Class A certificateholders, not to guarantee
or insure against losses. Accordingly, any funds so advanced are recoverable by
the master servicer out of amounts received on mortgage loans. Advances are
required to be deposited in the Collection Account by the second business day
prior to the related Distribution Date. The master servicer may make an
Advance:
(1)out of its own funds,
(2) out of funds in the Collection Account that are not part of the
Available Distribution Amount for the related Distribution Date or
(3) by any combination of clauses (1) and (2).
Advances made under clause (2) must be restored from the master
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servicer's funds when the amounts are required to be distributed as part of an
Available Distribution Amount.
Optional Termination
The master servicer may, at its option, on any Distribution Date, repurchase
from the mortgage pool all mortgage loans remaining outstanding when the
principal balance of the certificates is less than 10% of the initial principal
balance of the certificates as of the closing date. The repurchase price to be
distributed to certificateholders will equal the greater of:
(1) the aggregate Principal Balances of the mortgage loans plus accrued
interest thereon at the related Net Mortgage Rate, plus the appraised
value of any property acquired in respect of a mortgage loan,
(2) the fair market value of the mortgage loans and any property acquired
in respect of a mortgage loan, as determined by the master servicer,
and
(3) the sum of (a) the aggregate of the Class A Certificate Balance
together with one month's interest at the Pass-Through Rate and any
Class A Unpaid Interest Shortfall and (b) the sum of the Class B
Principal Balance together with one month's interest at the Class B
Pass-Through Rate and any previously undistributed shortfall in
interest due on the Class B certificates on prior Distribution Dates.
The Certificateholders will receive the repurchase price in the month
following the month of repurchase, first to the Class A certificateholders to
the extent of the amount in clause (3)(a) and then in accordance with the
pooling and servicing agreement.
Miscellaneous
In determining the percentage of the trust fund evidenced by a certificate
for purposes of determining the consent of certificateholders or other action
by certificateholders as discussed under "The Pooling and Servicing Agreement--
Amendments" in the prospectus, the percentage shall be based upon the relative
outstanding balances of the certificates. Amendments to the pooling and
servicing agreement requiring the consent of certificateholders shall require
only the consent of the holders of certificates of each class affected thereby,
evidencing, as to that class, Percentage Interests aggregating at least 66%.
Amendments to the pooling and servicing agreement may be made only with the
prior written consent of the Certificate Insurer. Certain other actions under
the pooling and servicing agreement also require the prior written consent of
the Certificate Insurer. The Certificate Insurer may direct the trustee to
waive any default by the master servicer under the pooling and servicing
agreement, except that a default in making any required distribution on any
certificate may only be waived by the affected certificateholder. Upon an Event
of Default, the trustee may terminate the rights of the master servicer only
with the consent of the Certificate Insurer, and shall terminate the master
servicer at the direction of the Certificate Insurer.
The Class A certificates will initially be registered in the name of Cede &
Co., the nominee of DTC. DTC is a limited-purpose trust company organized under
the laws of the
S-35
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered under the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations and facilitates the clearance and settlement of securities
transactions between participants in the securities through electronic book-
entry changes in accounts of participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Certificate owners who are not participants but desire to purchase, sell or
otherwise transfer ownership of Class A certificates may do so only through
participants, unless and until definitive Class A Certificates are issued. In
addition, Certificate owners will receive all distributions of principal of and
interest on the Class A certificates from the trustee through DTC and
participants. Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
certificates, except under the limited circumstances described below.
Unless and until definitive Class A certificates are issued, it is
anticipated that the only "certificateholder" of the Class A certificates will
be Cede & Co., as nominee of DTC. Certificate owners will not be
certificateholders as that term is used in the pooling and servicing agreement.
Certificate owners are only permitted to exercise the rights of
Certificateholders indirectly through participants and DTC.
While the Class A certificates are outstanding, except under the
circumstances described below, under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make book-
entry transfers among participants on whose behalf it acts with respect to the
Class A certificates and is required to receive and transmit distributions of
principal of, and interest on, the Class A certificates. Unless and until
definitive Class A certificates are issued, certificate owners who are not
participants may transfer ownership of Class A certificates only through
participants by instructing the participants to transfer Class A certificates,
by book-entry transfer, through DTC for the account of the purchasers of the
certificates, which account is maintained with their respective participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Class A certificates will be executed through DTC and the accounts
of the respective participants at DTC will be debited and credited.
Class A certificates will be issued in definitive registered form to
certificate owners, or their nominees, rather than to DTC only if:
. DTC or the depositor advises the trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
nominee and depository with respect to the Class A certificates and
the depositor or the trustee is unable to locate a qualified
successor,
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. the depositor, at its sole option and with the consent of the trustee,
elects to terminate the book-entry system through DTC or
. after the occurrence of an event of default under the pooling and
servicing agreement, DTC, at the direction of certificate owners
having a majority in Percentage Interests of the Class A certificates
together, advises the trustee in writing that the continuation of a
book-entry system through DTC, or a successor thereto, to the
exclusion of any physical certificates being issued to certificate
owners is no longer in the best interest of certificate owners.
Upon issuance of definitive certificates to certificate owners, those
certificates will be transferable directly, not exclusively on a book-entry
basis, and registered holders will deal directly with the trustee with respect
to transfers, notices and distributions.
DTC has advised the depositor and the trustee that, unless and until
definitive certificates are issued, DTC will take any action permitted to be
taken by a holder of Class A certificates under the pooling and servicing
agreement only at the direction of one or more participants to whose DTC
account the Class A certificates are credited. DTC has advised the depositor
that DTC will take action with respect to any Percentage Interests of the Class
A certificates only at the direction of and on behalf of the participants with
respect to the Percentage Interests of the Class A certificates. DTC may take
actions, at the direction of the related participants, with respect to some
Class A certificates which conflict with actions taken with respect to other
Class A certificates.
Issuance of the Class A certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Class A
certificates in the secondary market and the ability of certificate owners to
pledge them. In addition, since distributions on the Class A certificates will
be made by the trustee to DTC and DTC will credit the distributions to the
accounts of its participants, which will further credit them to the accounts of
indirect participants of certificate owners, certificate owners may experience
delays in the receipt of distributions.
The Trustee
will act as trustee of the trust fund. The mailing address of the
trustee's corporate trust office is and its telephone number is .
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this prospectus supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, unconditionally and
irrevocably guarantees that an amount equal to each full and complete Insured
Amount will be received by the trustee for distribution to holders of the Class
A certificates in accordance with the terms of the
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pooling and servicing agreement. The Certificate Insurer's obligations under
the Certificate Insurance Policy with respect to a particular Insured Amount
shall be finally and completely discharged to the extent funds equal to the
applicable Insured Amount are received from the Certificate Insurer by the
trustee. The Certificate Insurer is not responsible for the application of any
Insured Amount subsequent to the receipt of those amounts by the trustee.
Insured Amounts shall be paid only at the time set forth in the Certificate
Insurance Policy.
Notwithstanding the above paragraph, the Certificate Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the trust fund,
the REMIC or the trustee for withholding taxes, if any, including interest and
penalties in respect of this type of liability. The Certificate Insurance
Policy does not protect against the adverse consequences of, and does not
guarantee, any specified rate of prepayments nor protect against any risk other
than Nonpayment, including failure of the trustee to make any Insured Payment
due to holders of the Class A certificates. In addition, the Certificate
Insurance Policy does not cover any Net Interest Shortfalls in respect of the
Class A certificates.
In the event the trustee has notice that any payment of principal or interest
which has been made to a holder of the Class A certificates by or on behalf of
the trustee has been deemed a preferential transfer and recovered from its
registered owner under the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court of competent jurisdiction, the
Certificate Insurer will make these payments to the trustee.
The Certificate Insurer will pay any amount payable under the Certificate
Insurance Policy from its own funds on the later of:
. the business day next following the business day on which the Certificate
Insurer receives a notice of Nonpayment or
. the business day prior to the applicable Distribution Date.
The payments shall be made only upon presentation of an instrument in form
and substance satisfactory to the Certificate Insurer who shall be subrogated
to all rights of the holders of the Class A certificates to payment on the
Class A certificates to the extent of the insurance disbursements so made. Once
payments of the Insured Amounts have been made to the trustee, the Certificate
Insurer shall have no further obligation in respect of the Insured Amounts.
The Certificate Insurance Policy is being issued under and shall be construed
under, the laws of the State of New York, without giving effect to any conflict
of laws principles.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the Class A certificates.
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The following table sets forth selected financial information on the basis of
generally accepted accounting principles.
[Selected Financial Information]
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the consolidated financial
statements of the Certificate Insurer included as exhibits to the following
documents, which have been filed with the Securities and Exchange Commission by
the Certificate Insurer, are hereby incorporated by reference in the
Registration Statement to which the prospectus and this prospectus supplement
form a part:
(a) Annual report on Form 10-K of the Certificate Insurer for the year
ended December 31, 19 , which report included as an exhibit the
Certificate Insurer and subsidiaries' audited consolidated financial
statements for the year ended December 31, 19 .
(b) Quarterly report on form 10-Q for the period ended , 19 , which
report includes as an exhibit the Certificate Insurer unaudited financial
statements for the month period ended , 19 .
All financial statements of the Certificate Insurer and subsidiaries included
in documents filed under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Class A certificates shall be deemed to be
incorporated by reference into this prospectus supplement and to be a part
hereof from the respective dates of filing these documents.
The Certificate Insurer makes no representation regarding certificates or the
advisability of investing in the certificates and makes no representation
regarding, nor has it participated in the preparation of, the prospectus or
this prospectus supplement other than the information supplied by the
Certificate Insurer and presented herein under the heading "The Certificate
Insurance Policy and the Certificate Insurer."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft, special tax counsel to the depositor. Assuming compliance with all
provisions of the pooling and servicing agreement, for federal income tax
purposes, the trust fund will qualify as a REMIC under the Code.
For federal income tax purposes, the Class A and Class B certificates will
represent ownership of "regular interests" in the REMIC and will generally be
treated as debt instruments issued by the REMIC, and the Class R certificates
will constitute the sole class of "residual interests" in the REMIC. Holders of
the Class A certificates must report income on the Class A certificates on the
accrual method of accounting. See "Federal Income Tax Consequences--REMICs" in
the prospectus.
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For federal income tax reporting purposes, the Class A certificates will
[not] be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Class A
certificates in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
mortgage loans will prepay at a rate equal to a % SPA. No representation is
made that the mortgage loans will prepay at this rate or at any other rate. See
"Federal Income Tax Consequences--REMICs--Taxation of Owners of Regular
Certificates--Original Issue Discount" in the prospectus.
The IRS has issued OID Regulations under Sections 1271 to 1275 of the Code.
Purchasers of the Class A certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC regular
certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of the OID Regulations in ways that
could preclude their application to the certificates even in the absence of
Section 1272(a)(6) of the Code, the IRS could assert that the Class A
certificates are issued with original issue discount or should be governed by
the rules applicable to debt instruments having contingent payments or by some
other method not yet set forth in regulations. Prospective purchasers of the
Class A certificates are advised to consult their tax advisors concerning the
tax treatment of the certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
certificateholders and the IRS.
The Class A certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A certificate
will be treated as holding a certificate with amortizable bond premium will
depend on the certificateholders' purchase price and the distributions
remaining to be made on the certificate at the time of its acquisition by the
certificateholder. Holders of the Class A certificates should consult their tax
advisors regarding the possibility of making an election to amortize the
premium. See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
Regular Certificates" and "--Amortizable Premium" in the prospectus.
The Class A certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the trust fund
would be so treated. In addition, interest on the Class A certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that the Class A
certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Description of the Certificates--Optional
Termination" in this prospectus
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supplement and "Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the prospectus.
LEGAL INVESTMENT
The Class A certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. Investors should consult with their own legal advisors in determining
whether and to what extent the Class A certificates constitute legal
investments for them. See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
As described in the prospectus under "ERISA Considerations," Title I of the
ERISA, and Section 4975 of the Code impose certain duties and restrictions on
Plans and on persons who have certain specified relationships to Plans,
including fiduciaries and service providers. Comparable duties and restrictions
may exist with respect to any "governmental plan," as defined in Section 3(32)
of ERISA, subject to a Similar Law. There are certain exemptions issued by the
DOL that may be applicable to an investment by a Plan in the Class A
certificates, including the individual administrative exemption described below
and PTE 83-1. For a further discussion of the individual administrative
exemption and PTE 83-1, including the necessary conditions to their
applicability, and other important factors to be considered by a Plan
contemplating investing in the Class A certificates, see "ERISA Considerations"
in the prospectus.
The DOL has issued to First Union Corporation, the ultimate parent of First
Union Securities, Inc., an administrative exemption from certain of the
prohibited transaction provisions of Sections 406(a) and (b) and 407(a) of
ERISA, and the excise taxes imposed on prohibited transactions under Sections
4975(a) and (b) of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans,
and other obligations that meet the conditions and requirements of the
exemption. The receivables covered by the exemption apply to mortgage loans
such as the mortgage loans in the trust fund. The exemption will apply to the
acquisition, holding and resale of the Class A certificates, underwritten by an
"underwriter," provided that certain conditions set forth in the exemption
application are satisfied.
For purposes of this discussion, the term "underwriter" shall include:
(1) First Union Securities, Inc. and ,
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with First Union Securities, Inc. or and
S-41
(3) any member of the underwriting syndicate or selling group of which
First Union Securities, Inc., or a person described in (b) is a
manager or co-manager with respect to the Class A certificates.
The exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale, and holding of Class A certificates
to be eligible for exemptive relief under the exemption.
These general conditions are:
. first, the acquisition of Class A certificates by a Plan must be on
terms that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party;
. second, the rights and interests evidenced by the Class A certificates
must not be subordinated to the rights and interests evidenced by the
other certificates of the same trust;
. third, the Class A certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by
Standard & Poor's, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc.;
. fourth, the trustee cannot be an affiliate of any other member of the
"restricted group," which consists of any underwriter, the depositor,
the master servicer, any subservicer, the trustee, the provider of any
credit enhancement, any borrower with respect to mortgage loans
constituting more than 5% of the Cut-off Date Principal Balance and
their affiliates;
. fifth, the sum of all payments made to and retained by the underwriter
must represent not more than reasonable compensation for underwriting
or placing the Class A certificates; the sum of all payments made to
and retained by the depositor under the assignment of the mortgage
loans to the trust fund must represent not more than the fair market
value of the mortgage loans; and the sum of all payments made to and
retained by the master servicer and any subservicer must represent not
more than reasonable compensation for that person's services under the
pooling and servicing agreement and reimbursement of that person's
reasonable expenses in connection therewith; and
. sixth, the investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Securities Act.
The second general condition set forth above is satisfied because the Class A
certificates are not subordinated to any other class of certificates. It is a
condition of the issuance of the Class A certificates that they be rated not
lower than "[ ]" and "[ ]" by [ ] and [ ], respectively, thus, the
third general condition set forth above is satisfied with respect to the Class
A certificates as of the closing date. In addition, the fourth general
condition set forth above concerning the trustee not being an affiliate of any
other member of the restricted group is also satisfied as of the closing date.
A fiduciary of a
S-42
Plan contemplating purchasing a Class A certificate in the secondary market
must make its own determination that, at the time of purchase, the Class A
certificates continue to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan contemplating any purchase of a Class A
certificate must make its own determination that the first, fifth and sixth
general conditions set forth above will be satisfied with respect to the Class
A certificates as of the date of purchase.
Employee benefit plans that are governmental plans, as defined in Section
3(32) of ERISA, and church plans, as defined in Section 3(33) of ERISA,
provided no election has been made under Section 410(b) of the Code, are not
subject to ERISA requirements. Accordingly, assets of these plans may be
invested in the Class A certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Before purchasing a Class A certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided
in the exemption or the availability of any other prohibited transaction
exemptions, including PTE 83-1, and whether the conditions of any exemption
will be applicable to the Class A certificates. In addition, a fiduciary of a
governmental plan should make its own determination as to the need for and
availability of any exemptive relief under a Similar Law. Any fiduciary of a
Plan or governmental plan considering whether to purchase a Class A certificate
should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions ERISA, the Code or
Similar Law to this type of investment. See "ERISA Considerations" in the
prospectus.
INVESTMENTS BY PLANS ARE SUBJECT TO ERISA'S GENERAL FIDUCIARY REQUIREMENTS.
ACCORDINGLY, BEFORE INVESTING IN A CLASS A CERTIFICATE, A PLAN FIDUCIARY SHOULD
DETERMINE WHETHER THE INVESTMENT IS PERMITTED IN ACCORDANCE WITH THE DOCUMENTS
GOVERNING THE PLAN AND IS PRUDENT FOR THE PLAN IN VIEW OF ITS OVERALL
INVESTMENT POLICY AND THE COMPOSITION AND DIVERSIFICATION OF ITS PORTFOLIO.
The sale of Class A certificates to a Plan is in no respect a representation
by the depositor or underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
UNDERWRITING
[First Union Securities, Inc.] [and] [ ], the [sole] underwriter, has
agreed, on the terms and conditions of the underwriting agreement relating to
the Class A certificates, to purchase the entire principal amount of the Class
A certificates offered hereby.
S-43
In the underwriting agreement, the underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Class A
certificates offered hereby if any Class A certificates are purchased.
The aggregate proceeds to the depositor from the sale of the Class A
certificates will be approximately $ , plus accrued interest, before
deducting expenses payable by the depositor, estimated to be $ .
The distribution of the Class A certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. This prospectus supplement and the prospectus may be used by the
underwriter in connection with offers and sales related to market-making
transactions in the Class A certificates. The underwriter may act as principal
or agent in these transactions.
The underwriter may effect the transactions by selling the Class A
certificates to or through dealers, and the dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
underwriter. In connection with the sale of the Class A certificates, the
underwriter may be deemed to have received compensation from the depositor in
the form of underwriting compensation. The underwriter and any dealers that
participate with the underwriter in the distribution of the Class A
certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A certificates positioned by
them may be deemed to be underwriting discounts and commissions under the
Securities Act.
The underwriting agreement provides that the depositor will indemnify the
underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the underwriter may be required to
make in respect of liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of [the Certificate Insurer] and subsidiaries
as of December 31, 199 and December 31, 199 , and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 199 , incorporated by
reference in this prospectus supplement, have been incorporated herein in
reliance on the report of , independent accountants, given on the authority
of that firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the Class A certificates and certain tax matters with respect
thereto will be passed upon for the depositor by Cadwalader, Wickersham & Taft
and for the underwriter by Kennedy Covington Lobdell & Hickman, L.L.P.
S-44
RATINGS
It is a condition of the issuance of the Class A certificates that they be
rated " " by and " " by .
The ratings assigned by to mortgage loan asset backed pass-through
certificates address the likelihood of the receipt by certificateholders of
payments required under the pooling and servicing agreement. 's ratings
take into consideration the credit quality of the mortgage pool, structural and
legal aspects associated with the certificates, and the extent to which the
payment stream in the mortgage pool is adequate to make payments required under
the certificates. 's rating on the certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Prepayment and Yield Considerations" in this prospectus supplement.
The ratings assigned by to mortgage loan asset backed pass-through
certificates also address the likelihood of the receipt by certificateholders
of all distributions to which the certificateholders are entitled. The rating
process addresses the structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. The
ratings assigned to mortgage loan asset backed pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings do not address the possibility that certificateholders might suffer
a lower than anticipated yield.
The depositor has not requested a rating on the Class A certificates by any
rating agency other than and . However, there can be no assurance as
to whether any other rating agency will rate the Class A certificates, or, if
it does, what rating would be assigned by any other rating agency. A rating on
the certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Class A certificates by and .
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement
with respect to the Class A certificates.
S-45
GLOSSARY OF TERMS
"Accrual Period" for any Distribution Date means the one-month period
beginning on the first day of the month preceding the month of that
Distribution Date and ending on the last day of the month preceding the month
of that Distribution Date.
"Advance" means the amount, payable by the master servicer, equal to the
amount of delinquent Monthly Payments due on the immediately preceeding due
date and not paid.
"Available Distribution Amount" with respect to each Distribution Date, will
be the amount received in respect of the mortgage loans that is on deposit in
the Collection Account as of the close of business on the related Determination
Date plus the Advances deposited in the Distribution Account for the
Distribution Date, less the following amounts:
(1) amounts received on particular mortgage loans as late payments or
other recoveries of interest or principal, including Liquidation Proceeds,
Insurance Proceeds and condemnation awards, and respecting which the
master servicer previously made an unreimbursed Advance of those amounts;
(2) amounts representing the reimbursement for Non-recoverable Advances
and other amounts, including the Master Servicing Fee, permitted to be
withdrawn by the master servicer from, or not required to be deposited in,
the Collection Account;
(3) amounts representing all or part of a Monthly Payment due after the
due date for mortgage loan payments in the month of the Distribution Date;
(4) all proceeds from the repurchase of a mortgage loan, Principal
Prepayments, Liquidation Proceeds, Insurance Proceeds and condemnation
awards with respect to mortgage loans received after the related Principal
Prepayment Period, and all related payments of interest representing
interest for any period of time after the related due date; and
(5) all income from Eligible Investments held in the Collection Account
for the account of the master servicer.
"Available Distribution Amount Allocation" means the following amounts and
order of priority for the Available Distribution Amount:
(1) to the Class A certificateholders, interest, reduced as a result of
any Net Interest Shortfalls, for the related Accrual Period at the
Pass-Through Rate for the Class A certificates on the Class A
Certificate Balance, together with any Class A Unpaid Interest
Shortfall;
(2) to the Class A certificateholders, the Class A Formula Principal
Distribution Amount on account of principal until the Class A
Certificate Balance is reduced to zero;
(3) to the Certificate Insurer, the monthly premium due on the
Certificate Insurance Policy;
(4) to the Certificate Insurer, an amount equal to the Unreimbursed
Insurer Amounts;
S-46
(5) to the Reserve Fund, the amount required to be deposited in the
Reserve Fund; provided that this amount does not exceed the
Formula Excess Interest Amount;
(6) to the Class B certificateholders, interest for the related Accrual
Period at the Pass-Through Rate for the Class B certificates on
the Class B Certificate Balance, together with any previously
undistributed shortfalls in required distributions of interest on
the Class B certificates;
(7) to the Class A certificateholders, on account of principal, the
Unrecovered Principal Amounts, if any, for the mortgage loans for
the Distribution Date and all prior Distribution Dates that have
not previously been distributed under this clause until the Class
A Certificate Balance is reduced to zero;
(8) to the Class B certificateholders on account of principal, the
Class B Formula Principal Distribution Amount until the Class B
Certificate Balance is reduced to zero;
(9) to the Class B certificateholders, the Class B Loss Amounts not
previously distributed to them under this clause; and
(10) any remaining balance to the Class R certificateholders.
"Certificate Balance" when used in respect of the Class A or Class B
certificates, refers to the principal balance calculated in accordance with the
definitions of Class A Certificate Balance and Class B Certificate Balance.
"Certificate Insurance Policy" means an irrevocable financial guaranty
insurance policy which will be issued by the Certificate Insurer in favor of
the trustee.
"Class A Certificate Balance" is the initial Class A Certificate Balance less
all prior distributions to Class A certificateholders, on account of principal.
"Class A Formula Principal Distribution Amount" for a Distribution Date is
equal to the sum of:
. the Class A Percentage of the Scheduled Formula Principal Distribution
Amount and
. the Class A Prepayment Percentage of the Unscheduled Formula Principal
Distribution Amount.
"Class A Percentage" for a Distribution Date is equal to the percentage,
which shall never be greater than 100%, derived from dividing the Class A
Certificate Balance by the Pool Scheduled Principal Balance, before giving
effect to the Formula Principal Distribution Amount for the Distribution Date.
S-47
"Class A Prepayment Percentage" for any Distribution Date will be the
percentage indicated below:
Distribution Date Occurring In Class A Prepayment Percentage
- ------------------------------ -----------------------------
199 through 200 ....................... 100%;
200 through 200 ....................... the Class A Percentage, plus
70% of the Subordinated
Percentage;
200 through 200 ....................... the Class A Percentage, plus
60% of the Subordinated
Percentage;
200 through 200 ....................... the Class A Percentage, plus
40% of the Subordinated
Percentage;
200 through 200 ....................... the Class A Percentage, plus
20% of the Subordinated
Percentage; and
200 and thereafter.......................... the Class A Percentage;
Notwithstanding anything contained in the preceding table, if on any
Distribution Date the Class A Percentage exceeds the initial Class A
Percentage, then the Class A Prepayment Percentage for that Distribution Date
will once again be 100%. Reduction of the Class A Prepayment Percentage in
accordance with the preceding table is subject to the satisfaction of certain
criteria regarding delinquency and loss experience of the mortgage loans.
"Class A Unpaid Interest Shortfall" means the previously undistributed
shortfalls in required distributions of interest on the Class A certificates.
"Class B Certificate Balance" is the initial Class B Certificate Balance less
the sum of (1) all prior distributions to the Class B certificateholders on
account of principal and (2) the sum of all Class B Loss Amounts for prior
Distribution Dates; provided that this amount shall not be less than zero.
"Class B Formula Principal Distribution Amount" for a Distribution Date is
the sum of:
. the Subordinated Percentage of the Scheduled Formula Principal
Distribution Amount and
. the Subordinated Prepayment Percentage of the Unscheduled Formula
Principal Distribution Amount.
"Class B Loss Amount" for a Distribution Date is the amount, if any, by which
(a) the sum of (x) the Formula Principal Distribution Amount, not including the
amount in clause (7) of that definition, and (y) the aggregate of the
Unrecovered Principal Amounts, if
S-48
any, for the Distribution Date exceeds (b) the amount distributed on account of
principal to the holders of the certificates on the Distribution Date.
"Code" means Internal Revenue Code of 1986, as amended.
"Collection Account" means one or more accounts maintained in the name of the
trustee, under the pooling and servicing agreement.
"Cut-off Date Principal Balance" means the aggregate principal balance of the
mortgage pool as of the cut-off date. The Cut-off Date Principal Balance for
the Series 199 - is approximately $ .
"Determination Date" means the day of the month, or if this day is not a
business day, then the next preceding business day.
"Distribution Account" means the distribution account maintained in the name
of the trustee under the pooling and servicing agreement.
"Distribution Account Shortfall" with respect to any Distribution Date is the
sum of:
(1) the amount, if any, by which (a) the aggregate of the full amounts
due to be distributed under clauses (1) and (2) of the definition of
Available Distribution Amount Allocation exceeds (b) the amount of funds,
not including the funds representing the Insured Payment in respect of the
Distribution Date, that will be on deposit in the Distribution Account in
respect of the Distribution Date and available to be distributed on the
Class A certificates, after taking into account all deposits to be made to
the Distribution Account on or prior to the Distribution Date, including
without limitation all Advances and all funds to be transferred from the
Reserve Fund and
(2) the amount, on the Distribution Date that follows the month in which
there occurs the latest original scheduled maturity date of any mortgage
loan that was an Outstanding Mortgage Loan at any time during that month,
necessary to reduce the Class A Certificate Balance to zero, after giving
effect to all other distributions of principal to be made on the
Distribution Date in respect of the Class A certificates.
"Distribution Date" means the [25th] day of each month, or, if this day is
not a business day, the next succeeding business day.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Formula Excess Interest Amount" in respect of a Distribution Date is the
amount, if any, by which (1) one month's interest at the Weighted Average Net
Mortgage Rate of the mortgage loans on the aggregate Principal Balance of the
mortgage loans as of the beginning of the preceding month, giving effect to the
scheduled principal payments due on the due
S-49
date and unscheduled principal payments received prior to the due date, exceeds
(2) interest for the related Accrual Period at the Pass-Through Rate for the
Distribution Date on the aggregate Certificate Balance of the Class A and Class
B certificates.
"Formula Principal Distribution Amount" means, as to any Distribution Date,
the is the sum of:
(1) the principal portion of all Monthly Payments, whether or not
received, which were due on the related due date on outstanding
mortgage loans as of the related due date;
(2) with respect to each mortgage loan, all Principal Prepayments made
by the mortgagor during the Principal Prepayment Period;
(3) with respect to each mortgage loan not described in clause (5)
below, all Insurance Proceeds, condemnation awards and any other
cash proceeds from a source other than the mortgagor, to the extent
required to be deposited in the Collection Account under the
pooling and servicing agreement, which are allocable to principal
and were received during the related Principal Prepayment Period,
net of related unreimbursed servicing advances;
(4) with respect to each mortgage loan that has been repurchased under
the pooling and servicing agreement during the related Principal
Prepayment Period, an amount equal to the principal balance of the
mortgage loan as of the date of repurchase;
(5) with respect to each mortgage loan that became a Liquidated Mortgage
Loan during the related Principal Prepayment Period, the amount
allocable to the principal of the Liquidated Mortgage Loan that was
recovered out of the net liquidation proceeds in respect of the
Liquidated Mortgage Loan in the Principal Prepayment Period;
(6) with respect to each mortgage loan repurchased during the related
Principal Prepayment Period by the depositor on account of a breach
of a representation or warranty that materially adversely affects
the interests of the certificateholders or the Certificate Insurer,
an amount equal to the principal portion of the Purchase Price, not
including of any portion of the Purchase Price included in clause
(1) above; and
(7) any previously undistributed shortfall in the distribution of
amounts in clauses (1) through (6) of the Formula Principal
Distribution Amount for a prior Distribution Date.
"HFC" means Household Finance Corporation, the master servicer.
"Insured Amount" means with respect to any Distribution Date the sum of:
. the Distribution Account Shortfall for the Distribution Date and
. any Preference Amount.
"Insured Payment" means, with respect to any Distribution Date, the Insured
Amounts paid to the trustee by the Certificate Insurer.
S-50
"JVMC" means JV Mortgage Capital, L.P.
"Liquidated Mortgage Loan" means a defaulted mortgage loan as to which all
amounts that the master servicer believes can be recovered with respect to the
mortgage loan or the property acquired in respect of the mortgage loan have
been recovered.
"Master Servicing Fee" means the fee paid to the master servicer in an amount
equal to approximately one-twelfth of % of the principal balance of each
mortgage loan.
"Monthly Payments" means the monthly payments of principal and interest.
"Mortgage Rates" means the interest rates borne by the mortgage loans.
"Mortgaged Properties" means one- to four-family residential properties.
"Net Interest Shortfall" in respect of a Distribution Date is equal to the
sum of:
. the amount of interest which would otherwise have been received with
respect to any mortgage loan that was the subject of a Relief Act
Reduction and
. any Net Prepayment Interest Shortfall.
"Net Mortgage Rate" of a mortgage loan is its Mortgage Rate less the sum of:
(1) the Master Servicing Fee Rate of % and (2) the Certificate Insurance
Policy annual premium rate; provided that the sum of (1) and (2) will not
exceed %.
"Net Prepayment Interest Shortfall" in respect of a Distribution Date is the
aggregate of the Prepayment Interest Shortfalls incurred on the mortgage loans
in the preceding Principal Prepayment Period that were not made up by the
application of the Master Servicing Fees collected by the master servicer in
respect of the Principal Prepayment Period.
"Nonpayment" means, with respect to any Distribution Date, the sum of:
. the Distribution Account Shortfall for the Distribution Date and
. any Preference Amount.
"Non-recoverable Advances" means any Advances that the master servicer
determines will not be recoverable out of related late collections and
Liquidation Proceeds.
"Plan" means employee benefit plans and certain other retirement plans and
arrangements subject to ERISA or Section 4975 of the Code.
"OID Regulations" means the regulations under Sections 1271 to 1275 of the
Code generally addressing the treatment of debt instruments issued with
original issue discount.
"Outstanding Mortgage Loan" in respect of a due date is a mortgage loan which
was not the subject of a Principal Prepayment in full prior to the due date,
which did not become a Liquidated Mortgage Loan prior to the due date and which
was not repurchased on account of certain breaches of a representation or
warranty or conversion prior to the due date.
"Pass-Through Rate" for the Class A and Class B certificates means the
percentage set forth on page S-4 of this prospectus supplement.
S-51
"Percentage Interest" of a Class A certificate means the percentage obtained
from dividing its denomination by the original Class A Certificate Balance.
"Preference Amount" means any payment of principal or interest which has been
made to a holder of the Class A certificates by or on behalf of the trustee
which has been deemed a preferential transfer and recovered from its registered
owner under the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction.
"Prepayment Interest Shortfall" in respect of a mortgage loan is the amount
by which interest paid by the mortgagor in connection with a principal
prepayment of the mortgage loan is less than one month's interest at the
related Mortgage Rate on the amount prepaid.
"Principal Balance" of a mortgage loan is its principal balance remaining to
be paid at the close of business on the cut-off date; after deduction of all
principal payments due on or before the cut-off date whether or not paid, but
without deducting Monthly Payments due after the cut-off date and received on
or before the cut-off date; reduced by all amounts, including Advances, if any,
distributed to certificateholders relating to principal of the mortgage loan.
"Principal Prepayment Period" for any Distribution Date means the month
preceding the month of that Distribution Date.
"PTE 83-1" means Prohibited Transaction Class Exemption 83-1.
"Record Date" for a Distribution Date means the last business day of the
month preceding the month of that Distribution Date.
"Relief Act Reduction" is a reduction in the amount of monthly interest on a
mortgage loan under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"Reserve Fund" means a reserve fund established on the closing date that will
be funded over time from the amount available for distributions on the
certificates. The amount in the Reserve Fund will be used to make required
payments of principal and interest on the Class A certificates to the extent
necessary.
"Scheduled Formula Principal Distribution Amount" for a Distribution Date
means the amount specified in clause (1) of the definition of Formula Principal
Distribution Amount for that Distribution Date.
"Securities Act" means the Securities Act of 1933, as amended.
"Similar Law" means any federal, state or local law which is, to a material
extent, similar to the provisions of ERISA or the Code discussed under "ERISA
Considerations" in this prospectus supplement.
"SPA" means the Standard Prepayment Assumption.
"Subordinated Percentage" is equal to 100% less the Class A Percentage.
S-52
"Subordinated Prepayment Percentage" is equal to 100% less the Class A
Prepayment Percentage.
"Unrecovered Principal Amount" in respect of a Liquidated Mortgage Loan is
the portion, if any, of the principal of the Liquidated Mortgage Loan that was
not recovered upon its liquidation. An Unrecovered Principal Amount in respect
of a Distribution Date is one that was incurred in the immediately preceding
Principal Prepayment Period.
"Unreimbursed Insurer Amounts" means any previously unreimbursed payments
made under the Certificate Insurance Policy and any fees and expenses owed to
it under the related insurance agreement, together with interest thereon.
"Unscheduled Formula Principal Distribution Amount" for a Distribution Date
is the sum of the amounts in clauses (2), (3), (4), (5) and (6) of the
definition of Formula Principal Distribution Amount for that Distribution Date.
"Weighted average life" means the average amount of time from the date of
issuance of a security until each dollar of principal of the security will be
repaid to the investor.
"Weighted Average Net Mortgage Rate" is the weighted average of the Net
Mortgage Rates for the mortgage loans.
S-53
JV CAPITAL TRUST 19 - TRUST
(Issuer)
JV CAPITAL TRUST
(Depositor)
Residential Mortgage Pass-Through
Certificates, Series 19 -
$
(Approximate)
----------------
PROSPECTUS SUPPLEMENT
----------------
[First Union Securities, Inc.]
[Other Underwriter]
, 19
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and
the accompanying prospectus. We have not authorized anyone to
provide different information to you.
The offered certificates are not offered in any state where
their offer is impermissible.
Dealers will deliver a prospectus supplement and prospectus
when acting as underwriters of the offered certificates and
with respect to their unsold allotments or subscriptions. In
addition, all dealers selling offered certificates will
deliver a prospectus supplement and prospectus for ninety days
from the date of this prospectus supplement.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+Depositor may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This prospec- +
+tus is not an offer to sell these securities and is not soliciting an offer +
+to buy these securities in any state where the offer or sale is not permit- +
+ted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS, SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1999
Prospectus
JV CAPITAL TRUST
Depositor
Residential Mortgage Pass-Through Certificates
(Issuable in series by separate trust funds)
Each trust fund--
You should
carefully . will issue a series of residential mortgage pass-through
consider certificates, which will consist of one or more classes of
the risk certificates; and
factors
beginning
on page 12 . will own--
of this
prospectus. . a pool or pools of fixed or adjustable interest rate,
conventional mortgage loans which are secured by a first,
second or more junior lien on a one- to four-family
Neither the residential property and all or a portion of which may
certificates consist of sub-prime mortgage loans; and
of any
series nor . other assets described in this prospectus and the
the related accompanying prospectus supplement.
underlying
mortgage Each pool of mortgage loans--
loans will
be insured . will be sold to the related trust fund by the depositor, who
or will have in turn purchased them from JV Mortgage Capital,
guaranteed L.P., one of its affiliates;
by any
governmental . will be underwritten to JV Mortgage Capital, L.P.'s
agency or standards or other standards as described in this prospectus
instrumentality. and the accompanying prospectus supplement; and
. will be master serviced by Household Finance Corporation.
The
certificates
of each Each series of certificates--
series will
represent . will represent interests in the related trust fund;
interests
in the . may provide credit support for certain classes by
related "subordinating" certain classes to other classes of
trust only certificates; any subordinated classes will be entitled
and will to payment subject to the payment of more senior classes
not and may bear losses before more senior classes;
represent
interests . may be entitled to one or more of the other types of
in or credit support described in this prospectus; and
obligations
of JV . will be paid only from the assets of the related trust
Capital fund
Trust, the
master
servicer or
the
underwriter
or any
affiliate
of these
parties.
This
prospectus
may be used
to offer
and sell
any series
of
certificates
only if
accompanied
by the
prospectus
supplement
for that
series.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these certificates or determined that this prospectus
is accurate or complete. Any representation to the contrary is a criminal
offense.
The date of this Prospectus is , 19 .
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular
series of certificates, including your series, and (b) the accompanying
prospectus supplement, which will describe the specific terms of your series of
certificates, including:
.the principal balances and/or interest rates of each class;
.the timing and priority of interest and principal payments;
.statistical and other information about the mortgage loans;
.information about credit enhancement, if any, for each class;
.the ratings for each class; and
.the method for selling the certificates.
You should rely on the information in the prospectus supplement for the terms
of a particular series of certificates.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different
information. The certificates are not being offered in any state where the
offer is not permitted. The depositor does not claim the accuracy of the
information in this prospectus or the accompanying prospectus supplement as of
any date other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
The depositor's principal executive offices is located at 1100 North Market
Street, Rodney Square North, Wilmington, DE 19890 and the depositor's telephone
number is (302) 651-1000.
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TABLE OF CONTENTS
Page
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Important Notice About Information Presented In This Prospectus And The
Accompanying Prospectus Supplement...................................... 2
Summary Of Terms......................................................... 6
Risk Factors............................................................. 12
Limited Liquidity for Certificates May Affect Your Ability to Resell... 12
Real Estate Market Conditions Affect Mortgage Loan Performance......... 12
Geographic Concentration May Increase Rates of Loss and Delinquency.... 12
Unpredictability of Prepayments on Assets May Adversely Affect Average
Lives and Yields of Certificates...................................... 13
Limited Assets for Payment of Certificates............................. 14
Limitations, Reduction and Substitution of Credit Enhancement.......... 14
Delays and Expenses Associated with Legal Actions May Delay
Distributions on Certificates......................................... 15
Increased Risk of Losses on Foreclosure of Junior Mortgage Loans....... 16
Increased Risk of Delinquencies and Foreclosures on Sub-prime Mortgage
Loans................................................................. 16
Increased Risk of Loss if Mortgage Loans are Delinquent................ 17
Effects of Failure to Comply with Consumer Protection Laws; Other Legal
Considerations........................................................ 17
Subordination of Subordinate Securities Increases Risk of Loss......... 18
Limited Nature of Ratings.............................................. 19
Page
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Lowering of Rating on Certificates...................................... 19
Risks of Loss on Balloon Payment Loans if Obligor is Unable to Refinance
or Sell Related Property............................................... 20
Special Federal Tax Considerations Regarding Residual Certificates and
FASIT Certificates..................................................... 20
Owners of Book-Entry Certificates Not Entitled to Exercise Rights of
Holders of Certificates................................................ 21
Cash Flow Agreements are Subject to Counterparty Risk................... 21
Defined Terms............................................................... 21
The Trust Fund.............................................................. 22
The Mortgage Loans........................................................ 22
General................................................................. 22
Payment Provisions of the Mortgage Loans................................ 23
Mortgage Loan Information in Prospectus Supplements..................... 25
Loan-to-Value Ratios.................................................... 26
Single Family and Cooperative Loans..................................... 26
Home Equity Loans....................................................... 27
Substitution of Mortgage Loans............................................ 28
Cash Flow Agreements...................................................... 28
Use Of Proceeds............................................................. 28
The Depositor............................................................... 29
The Master Servicer......................................................... 29
Mortgage Loan Program....................................................... 30
Underwriting Standards.................................................... 30
Summaries of the Underwriting Programs.................................... 32
Qualifications of Originators............................................. 37
Representations and Warranties; Repurchases............................... 37
Description Of The Certificates............................................. 38
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Page
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General.................................................................. 39
Distributions on Certificates............................................ 41
General................................................................ 41
Available Distribution Amount.......................................... 41
Distributions of Interest.............................................. 41
Distributions of Principal............................................. 42
Unscheduled Distributions.............................................. 42
Categories of Classes of Certificates.................................... 43
Advances................................................................. 47
Reports to Certificateholders............................................ 48
Book-Entry Registration.................................................. 49
Credit Enhancement......................................................... 54
General.................................................................. 54
Subordination............................................................ 55
Mortgage Pool Insurance Policies......................................... 56
Special Hazard Insurance Policies........................................ 57
Bankruptcy Bonds......................................................... 57
Reserve Funds............................................................ 58
Cross Support............................................................ 58
Limited Guarantee........................................................ 59
Letter of Credit......................................................... 59
Surety Bonds............................................................. 59
Overcollateralization.................................................... 59
Yield And Prepayment Considerations........................................ 59
The Pooling And Servicing Agreement........................................ 61
Assignment of Mortgage Loans............................................. 62
Payments on Mortgage Loans; Deposits to Collection Account............... 64
Pre-Funding Account...................................................... 67
Collection Procedures.................................................... 67
Hazard Insurance......................................................... 68
Realization Upon Defaulted Mortgage Loans................................ 70
Primary Mortgage Insurance Policies.................................... 70
Junior Mortgages....................................................... 72
Page
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FHA Insurance; VA Guarantees............................................ 73
Servicing and Other Compensation and Payment of Expenses.................. 75
Evidence as to Compliance................................................. 75
Certain Matters Regarding the Master Servicer and The Depositor........... 76
Special Servicers......................................................... 77
Events of Default......................................................... 77
Rights upon Event of Default.............................................. 78
Amendment................................................................. 79
Termination; Optional Termination......................................... 80
The Trustee............................................................... 80
Certain Legal Aspects Of The Mortgage Loans................................. 81
General................................................................... 81
Home Ownership and Equity Protection Act of 1994.......................... 81
Prepayment Charges........................................................ 82
Cooperatives.............................................................. 82
Foreclosure/Repossession.................................................. 84
Deed of Trust........................................................... 84
Mortgages............................................................... 84
Junior Mortgages........................................................ 86
Cooperative Loans....................................................... 86
Rights of Redemption...................................................... 87
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders.................................................................. 88
Texas Home Equity Loans................................................... 91
Environmental Risks....................................................... 92
Due-On-Sale Clauses....................................................... 94
Prepayment Charges........................................................ 95
Subordinate Financing..................................................... 95
Applicability of Usury Laws............................................... 96
Soldiers' and Sailors' Civil Relief Act................................... 96
Federal Income Tax Consequences............................................. 97
General................................................................... 97
Taxable Mortgage Pools.................................................. 98
Remics.................................................................... 98
Classification of REMICs................................................ 98
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Page
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Characterization of Investments in REMIC Certificates.................. 101
Tiered REMIC Structures................................................ 102
Taxation of Owners of Regular Certificates............................. 102
Taxation of Owners of Residual Certificates............................ 113
Taxes That May Be Imposed on the REMIC Pool............................ 121
Taxation of Certain Foreign Investors.................................. 125
Grantor Trust Funds...................................................... 127
Classification of Grantor Trust Funds.................................. 127
Standard Certificates.................................................. 127
Stripped Certificates.................................................. 132
Reporting Requirements and Backup Withholding.......................... 136
Taxation of Certain Foreign Investors.................................. 136
State, Local And Other Tax Considerations.................................. 137
ERISA Considerations....................................................... 137
General.................................................................. 137
Certain Requirements under ERISA and the Code............................ 138
General................................................................ 138
Parties in Interest/Disqualified Persons............................... 138
Delegation of Fiduciary Duty........................................... 138
Page
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Applicability to Non-ERISA Plans....................................... 139
Administrative Exemptions................................................ 139
Individual Administrative Exemptions................................... 139
PTE 83-1............................................................... 141
Non-ERISA Plans and Exempt Plans......................................... 142
Unrelated Business Taxable
Income--Residual Certificates........................................... 142
Legal Investment........................................................... 143
Method Of Distribution..................................................... 145
Legal Matters.............................................................. 146
Financial Information...................................................... 146
Rating..................................................................... 147
Reports To Certificateholders.............................................. 147
Where You Can Find More Information........................................ 147
Incorporation Of Certain Information By Reference.......................... 148
Glossary Of Terms.......................................................... 149
Annex I.................................................................... A-1
Global Clearance, Settlement And Tax Documentation Procedures.............. A-1
Initial Settlement....................................................... A-1
Secondary Market Trading................................................. A-2
Certain U.S. Federal Income Tax Documentation Requirements................. A-4
5
SUMMARY OF TERMS
. This summary highlights selected information from this document, but does not
contain all of the information that you should consider in making your
investment decision. To understand all of the terms of a series of
certificates, please read this entire document and the accompanying
prospectus supplement carefully.
. This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates
and is qualified by the full description of these calculations, cash flows
and other information in this prospectus and the accompanying prospectus
supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuer
Each series of Residential Mortgage Pass-Through Certificates will be issued
by a separate trust fund. Each series will be issued under a separate pooling
and servicing agreement to be entered into with respect to the series.
Depositor
JV Capital Trust, a business trust formed under the laws of the State of
Delaware. See "The Depositor."
Trustee
The trustee for each series of certificates will be specified in the related
prospectus supplement. See "The Pooling and Servicing Agreement" herein for a
description of the trustee's rights and obligations.
Originators
The depositor will acquire the mortgage loans for each trust fund from JV
Mortgage Capital, L.P., which will acquire the mortgage loans from originators
that may be affiliates of the depositor. The originators may have originated
the mortgage loans or acquired them from other originators or entities.
Master servicer
Household Finance Corporation, as master servicer, will service the mortgage
loans contained in each trust fund. The master servicer will perform or cause
to be performed the servicing functions with respect to the mortgage loans
under the related pooling and servicing agreement. See "The Pooling and
Servicing Agreement."
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TRUST FUND ASSETS
Each trust fund will own the related mortgage loans and certain other
accounts, obligations or agreements, in each case as described in the related
prospectus supplement.
If specified in the related prospectus supplement, a cash deposit will be
made into the trust fund on the date a series is issued which will be used
within three months to purchase additional mortgage loans for the trust fund.
The mortgage loans in each trust fund:
. will be secured by first, second or more junior liens on fee simple or
leasehold interests in one- to four-family properties;
. may include cooperative apartment loans secured by shares issued by
private, nonprofit cooperative housing corporations;
. may be conventional loans not insured or guaranteed by any governmental
agency or may be loans insured by the Federal Housing Authority or
partially guaranteed by the Veterans' Administration;
. may include closed end and/or revolving home equity loans; and
. will be secured by real property located in one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the
United States.
See "The Trust Fund--The Mortgage Loans."
The payment terms on the mortgage loans may include one or more of the
following:
. interest may be paid at a fixed or adjustable rate;
. payment of interest may be deferred and the amount deferred added to the
principal balance of the loan;
. part of the interest payable may be paid by a party other than the
borrower;
. principal may be paid to fully amortize the loan over its life;
. principal may be amortized over a longer period than the life of the loan
so that a substantial payment is due at maturity; and
. monthly payments of principal and interest may be fixed for the life of
the loan or change over time.
See "The Trust Fund--The Mortgage Loans--Payment Provisions of the Mortgage
Loans."
DISTRIBUTIONS ON THE CERTIFICATES
Each series of certificates will include one or more classes. A class of
certificates will be entitled, to the extent of funds available, to either:
. principal and interest payments in respect of the related mortgage loans;
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. principal distributions, with no interest distributions;
. interest distributions, with no principal distributions; or
. other distributions as are described in the applicable prospectus
supplement.
Interest Distributions
With respect to each series of certificates, interest on the related mortgage
loans at the weighted average of their mortgage interest rates, after netting
out servicing fees and certain other amounts as described in this prospectus or
in the applicable prospectus supplement, will be passed through to holders of
the related classes of certificates in accordance with the particular terms of
each class of certificates. The terms of each class of certificates will be
described in the related prospectus supplement. See "Description of the
Certificates--Distributions on Certificates--Distributions of Interest."
Except as otherwise specified in the applicable prospectus supplement,
interest on each class of certificates of each series will accrue at the pass-
through rate for each class indicated in the applicable prospectus supplement
on its outstanding certificate balance or notional amount. See "Description of
the Certificates--Distributions on Certificates--Distributions of Interest."
Principal Distributions
With respect to a series of certificates, principal payments, including
prepayments, on the related mortgage loans will be passed through to holders of
the related certificates or otherwise applied in accordance with the related
pooling and servicing agreement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of
certificates of a series in the manner specified in the applicable prospectus
supplement. See "Description of the Certificates--Distributions on
Certificates--Distributions of Principal."
Distribution Dates
Distributions on the certificates will be made on the dates specified in the
related prospectus supplement.
Distributions on certificates may be made monthly, quarterly or semi-
annually, as specified in the prospectus supplement.
Record Dates
Distributions will be made on each distribution date to certificateholders of
record at the close of business on the last business day of the month preceding
the month in which the distribution date occurs or on another date specified in
the applicable prospectus supplement.
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CREDIT ENHANCEMENT
Subordination
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinated certificates. The rights
of the holders of subordinated certificates of a series to receive
distributions will be subordinated to the rights of the holders of the senior
certificates of the same series to the extent and in the manner specified in
the applicable prospectus supplement.
Subordination is intended to enhance the likelihood of the timely receipt by
the senior certificateholders of their proportionate share of scheduled monthly
principal and interest payments on the related mortgage loans and to protect
them from losses. This protection will be effected by:
. the preferential right of the senior certificateholders to receive, prior
to any distribution being made in respect of the related subordinated
certificates on each distribution date, current distributions on the
related mortgage loans of principal and interest due them on each
distribution date out of the funds available for distributions on the
distribution date;
. the right of holders to receive future distributions on the mortgage
loans that would otherwise have been payable to the holders of
subordinated certificates;
. the prior allocation to the subordinated certificates of all or a portion
of losses realized on the underlying mortgage loans; and/or
. any other method specified in the related prospectus supplement.
However, subordination does not provide full assurance that there will be no
losses on the senior certificates.
Other Types of Credit Enhancement
If so specified in the applicable prospectus supplement, the certificates of
any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
. special hazard insurance policy . over-collateralization
. FHA insurance or a VA guarantee . bankruptcy bond
. mortgage pool insurance policy . limited guarantee
. reserve fund . financial guaranty insurance policy
. letter of credit . surety bond
. cross-support
Any credit support will be described in the applicable prospectus supplement.
See "Credit Enhancement."
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ADVANCES OF DELINQUENT PAYMENTS
If specified in the related prospectus supplement, the master servicer will
be obligated to advance amounts corresponding to delinquent principal and
interest payments on the mortgage loans until the first day of the month
following the date on which the related mortgaged property is sold at a
foreclosure sale or the related mortgage loan is otherwise liquidated, or until
any other time as specified in the related prospectus supplement.
If specified in the related prospectus supplement, the trustee or another
entity will be required to make advances to the extent the master servicer
fails to do so. Any obligation to make advances may be subject to limitations
described in the related prospectus supplement. Advances will be reimbursable
to the extent described in this prospectus and in the related prospectus
supplement.
FORMS OF CERTIFICATES
The certificates will be issued either:
. in book-entry form through the facilities of DTC; or
. in definitive, fully registered, certificated form.
If you own certificates in book-entry form, you will not receive a physical
certificate representing your ownership interest in your certificates, except
under extraordinary circumstances. Instead, DTC will effect payments and
transfers by means of its electronic recordkeeping services, acting through
certain participating organizations. This may result in certain delays in your
receipt of distributions and may restrict your ability to pledge your
certificates. Your rights with respect to book-entry certificates may generally
only be exercised through DTC and its participating organizations. See
"Description of the Certificates--Book-Entry Registration."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If specified in the prospectus supplement with respect to a series, to effect
an early termination of the related trust fund, all, but not less than all, of
the mortgage loans in that trust fund and any property acquired with respect to
the mortgage loans, may be purchased by the master servicer, the depositor or
another person identified in the related prospectus supplement. Any purchase
must be made at the time, in the manner and at the price specified in the
prospectus supplement.
Exercise of the right of purchase will result in the early retirement of the
certificates of that series. See "Yield and Prepayment Considerations."
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ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan subject to the fiduciary
responsibility provisions of ERISA, you should carefully review with your own
legal advisors whether the purchase or holding of certificates could give rise
to a transaction prohibited or otherwise impermissible under ERISA or the
Internal Revenue Code. See "ERISA Considerations."
TAX STATUS
The treatment of the certificates for federal income tax purposes will depend
on:
. whether a REMIC election is made with respect to a series of
certificates;
. if a REMIC election is made, whether the certificates are regular
interests or residual interests;
. whether a FASIT election is made with respect to a series of
certificates;
. if a FASIT election is made, whether the certificates are regular
interests or ownership interests; and
. whether the certificates are interests in a trust fund treated as a
grantor trust.
See "Federal Income Tax Consequences."
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of certificates offered will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. If your investment authority is subject to legal restrictions you
should consult your own legal advisors to determine whether and to what extent
the certificates constitute legal investments for you. See "Legal Investment"
herein and in the applicable prospectus supplement.
RATING
Certificates of any series will not be offered by this prospectus and a
prospectus supplement unless each class offered is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization.
. A security rating is not a recommendation to buy, sell or hold the
certificates of any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
. Ratings do not address the effect of prepayments on the yield you may
anticipate when you purchase your certificates.
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RISK FACTORS
Before making an investment decision, you should carefully consider the
following risks and the risk factors set forth in the related prospectus
supplement under "Risk Factors", which we believe describe all the principal
factors that make an investment in the offered certificates of a series
speculative or risky.
Limited Liquidity for Certificates May Affect Your Ability to Resell
Certificates
The liquidity of your certificates may be limited. You should consider that:
. the prospectus supplement for a series of certificates may indicate that
the underwriter intends to make a market in the certificates, but no
underwriter is obligated to do so;
. a secondary market for a series of certificates may not develop or, if a
secondary market does develop, it may not provide you with liquidity of
investment or it may not continue for the life of your certificates; and
. the certificates will not be listed on any securities exchange.
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by
a decline in real estate values and changes in the mortgagors' financial
condition. There is no assurance that the values of the mortgaged properties
securing the mortgage loans underlying any series of certificates have remained
or will remain at their levels on the dates of origination of the related
mortgage loans.
Delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry and those experienced in
the master servicer's servicing portfolio if the residential real estate market
should experience an overall decline in property values large enough to cause
the outstanding balances of the mortgage loans contained in a particular trust
fund and any secondary financing on the mortgaged properties to become equal to
or greater than the value of the mortgaged properties.
If losses on mortgage loans underlying a series are not covered by credit
enhancement, certificateholders of the series will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the mortgaged properties for recovery of the outstanding principal and
unpaid interest on the defaulted mortgage loans. See "The Trust Fund--The
Mortgage Loans" and "Mortgage Loan Program--Underwriting Standards."
Geographic Concentration May Increase Rates of Loss and Delinquency
In addition to risk factors related to the residential real estate market
generally, certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets or be
directly or indirectly affected by natural disasters or civil disturbances such
as earthquakes, hurricanes, floods, eruptions or riots. Mortgage loans in
affected areas will experience higher rates of loss and delinquency than
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on mortgage loans generally. Although mortgaged properties located in certain
identified flood zones will be required to be covered, to the maximum extent
available, by flood insurance, as described under "The Pooling and Servicing
Agreement--Hazard Insurance," no mortgaged properties will otherwise be
required to be insured against earthquake damage or any other loss not covered
by standard hazard insurance policies, as described under "The Pooling and
Servicing Agreement--Hazard Insurance."
The ability of mortgagors to make payments on the mortgage loans may also be
affected by factors which do not necessarily affect property values, such as
adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community, such
as mortgagors relying on commission income and self-employed mortgagors. These
occurrences may accordingly affect the actual rates of delinquencies,
foreclosures and losses with respect to any trust fund.
The mortgage loans underlying certain series of certificates may be
concentrated in certain regions. A high concentration in a particular region
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without a high concentration. See "Yield and
Prepayment Considerations."
Unpredictability of Prepayments on Assets May Adversely Affect Average Lives
and Yields of Certificates
The yield of the certificates of each series will depend in part on the rate
of principal payment on the mortgage loans, including prepayments, liquidations
due to defaults and mortgage loan repurchases. The yield may be adversely
affected, depending upon whether a particular certificate is purchased at a
premium or a discount, by a higher or lower than anticipated rate of
prepayments on the related mortgage loans. In particular:
. the yield on classes of certificates entitling their holders primarily
or exclusively to payments of interest or primarily or exclusively to
payments of principal will be extremely sensitive to the rate of
prepayments on the related mortgage loans; and
. the yield on certain classes of certificates may be relatively more
sensitive to the rate of prepayment of specified mortgage loans than
other classes of certificates.
The rate of prepayments on mortgage loans is influenced by a number of factors,
including:
. prevailing mortgage market interest rates;
. local and national economic conditions;
. homeowner mobility; and
. the ability of the borrower to obtain refinancing.
In addition, your yield may be adversely affected:
. by interest shortfalls which may result from the timing of the receipt
of prepayments or liquidations if the interest shortfalls are not
covered by aggregate servicing fees or other mechanisms specified in the
applicable prospectus supplement;
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. to the extent that losses on the mortgage loans in the related trust
fund are allocated to your certificates; and
. to the extent of unadvanced delinquencies on the mortgage loans in the
related trust fund.
Classes of certificates identified in the applicable prospectus supplement as
subordinated certificates are more likely to be affected by delinquencies and
losses than other classes of certificates.
See "Yield and Prepayment Considerations."
Limited Assets for Payment of Certificates
Except for any related credit enhancement described in the applicable
prospectus supplement,
. the mortgage loans included in the related trust fund will be the sole
source of payments on the certificates of a series;
. the certificates of any series will not represent an interest in or
obligation of the depositor, any originator, the master servicer, the
trustee or any of their affiliates; and
. the certificates of any series will not be guaranteed or insured by any
governmental agency or instrumentality, the depositor, the master
servicer, the trustee, any of their affiliates or, except to the extent
specified in the related prospectus supplement, any other person.
Consequently, in the event that payments on the mortgage loans are
insufficient or otherwise unavailable to make all payments required on the
certificates, there will be no recourse to the depositor, the master servicer,
the trustee or, except as specified in the applicable prospectus supplement,
any other entity.
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
mortgage loans. Under certain circumstances, the credit enhancement provided
may be limited to one or more classes of certificates.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to:
. subordination of other classes of certificates of the same series;
. a limited guarantee;
. a letter of credit;
. a mortgage pool insurance policy;
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. a special hazard insurance policy;
. a bankruptcy bond;
. a reserve fund;
. cross support;
. Federal Housing Administration insurance and Veterans Administration
guarantee; or
. a surety bond.
See "Credit Enhancement."
Regardless of the form of credit enhancement provided:
. the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula;
. the credit enhancement may provide only very limited coverage as to
certain types of losses, and may provide no coverage as to certain other
types of losses; and
. all or a portion of the credit enhancement for any series of
certificates will generally be permitted to be reduced, terminated or
substituted for, if each applicable rating agency confirms that the then
current rating of the certificates of the series will not be adversely
affected.
In the event losses exceed the amount of coverage provided by any credit
enhancement or losses of a type not covered by any credit enhancement occur,
the losses will be borne by the holders of the related certificates or certain
classes of certificates.
See "Credit Enhancement."
Delays and Expenses Associated with Legal Actions May Delay Distributions on
Certificates
Foreclosure action and actions to obtain deficiency judgment:
. are regulated by statutes and laws;
. may be subject to delays; and
. may be expensive.
If a borrower defaults, the master servicer, because of these factors, may
have trouble obtaining a deficiency judgment or foreclosing on a mortgage loan.
If the certificate insurer does not make a required payment or if the
subordinated certificates that provide credit enhancement for your certificates
are no longer outstanding, a delay or inability of the master servicer to
foreclose or obtain a deficiency judgment may delay distributions to your
certificates or result in a loss on your certificates.
15
Increased Risk of Losses on Foreclosure of Junior Mortgage Loans
Certain of the mortgage loans may be secured by junior liens and the related
first and other senior liens, if any, may not be included in the trust fund.
The primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior lien to satisfy fully both the senior lien
and the mortgage loan.
If a holder of the senior lien forecloses on a mortgaged property, the
proceeds of the foreclosure or similar sale will be applied:
. first, to the payment of court costs and fees in connection with the
forclosure;
. second, to real estate taxes; and
. third, in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the senior lien.
The claims of the holder of the senior lien will be satisfied in full out of
proceeds of the liquidation of the mortgaged property, if the proceeds are
sufficient, before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
If the master servicer foreclosed on any mortgaged property, it would do so
subject to any related senior lien. For the debt related to the mortgaged
property to be paid in full at the sale, a bidder at the foreclosure sale of
the mortgage loan would have to bid an amount sufficient to pay off all sums
due under the mortgage loan and the senior lien or purchase the mortgaged
property subject to the senior lien. If the proceeds from a foreclosure or
similar sale of the related mortgaged property were insufficient to satisfy
both loans in the aggregate, the trust fund, as the holder of the junior lien,
and, accordingly, you as an owner of the related certificates, would bear the
risk of delay in distributions while a deficiency judgment against the borrower
was being obtained and the risk of loss if the deficiency judgment were not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the senior
mortgage.
Increased Risk of Delinquencies and Foreclosures on Sub-prime Mortgage Loans
All or a portion of the mortgage loans may consist of mortgage loans
underwritten in accordance with the underwriting for "sub-prime mortgage
loans". A sub-prime mortgage loan is a mortgage loan that is ineligible for
purchase by Fannie Mae or the Federal Home Loan Mortgage Corporation due to
borrower credit characteristics, property characteristics, loan documentation
guidelines or other credit characteristics that do not meet Fannie Mae or the
Federal Home Loan Mortgage Corporation underwriting guidelines. These may
include a loan made to a borrower whose creditworthiness and repayment ability
do not satisfy Fannie Mae or the Federal Home Loan Mortgage Corporation
underwriting guidelines and a borrower who may have a record of major
derogatory credit items such as default on a prior mortgage loan, credit write-
offs, outstanding judgments or prior bankruptcies.
As a consequence, delinquencies and foreclosures can be expected to be more
prevalent with respect to sub-prime mortgage loans than with respect to
mortgage loans originated in
16
accordance with Fannie Mae or the Federal Home Loan Mortgage Corporation
underwriting guidelines, and changes in the values of the mortgaged properties
may have a greater effect on the loss experience of sub-prime mortgage loans
than on mortgage loans originated in accordance with Fannie Mae or the Federal
Home Loan Mortgage Corporation underwriting guidelines.
Increased Risk of Loss if Mortgage Loans are Delinquent
A portion of the mortgage loans may be delinquent upon the issuance of the
related certificates. Credit enhancement provided with respect to a particular
series of certificates may not cover all losses related thereto. You should
consider the risk that the inclusion of delinquent mortgage loans in the trust
fund for a series may cause the rate of defaults and prepayments on the
mortgage loans to increase. This may cause losses to exceed the available
credit enhancement for a series and affect the yield on your certificates.
Effects of Failure to Comply with Consumer Protection Laws; Other Legal
Considerations
There are various state laws, public policies and principles of equity that
protect consumers. These laws, policies and principles:
. regulate interest rates and other charges;
. require certain disclosure; and
. require the licensing of mortgage loan originators and servicers.
Violation of these laws, policies and principles:
. may limit the ability of the master servicer to collect all or part of
the principal of or interest on the mortgage loans;
. may entitle the borrower to a refund of amounts previously paid; and
. could subject the master servicer to damages and administrative
sanctions.
See "Certain Legal Aspects of Mortgage Loans."
The mortgage loans may also be subject to federal laws, including:
. the Federal Truth in Lending Act and Regulation Z under that act, which
require certain disclosures to the borrowers regarding the terms of the
mortgage loans;
. the Equal Credit Opportunity Act and Regulation B under that act, which
prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the
extension of credit;
. the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and
. the National Housing Act of 1934 with respect to mortgage loans insured
thereunder.
17
The mortgage loans may be subject to the Home Ownership and Equity Protection
Act of 1994 which amended the Federal Truth in Lending Act as it applies to
mortgages subject to the Home Ownership and Equity Protection Act of 1994. This
act requires:
. certain additional disclosures;
. specifies the timing of the disclosures;
. limits or prohibits the inclusion of certain provisions in mortgages
subject to the Home Ownership Act; and
. provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which
the borrower could assert against the original lender.
The maximum damages that may be recovered in an action under this act from an
assignee is the remaining amount of indebtedness plus the total amount paid by
the borrower in connection with the mortgage loan. Any trust fund for which the
mortgage loans include mortgage loans subject to this act would be subject to
all of the claims and defenses that the borrower could assert against the
original lender. Any violation of this act that would result in liability under
this act would be a breach of the applicable warranting party's representations
and warranties, and the warranting party would be obligated to cure, repurchase
or, if permitted by the related agreement, substitute for the mortgage loan in
question.
Certain of the mortgage loans may be home equity loans secured by mortgaged
properties located in Texas. The Texas Constitution permits these loans, but
significant limitations were imposed on permitted terms, conditions and
practices incident to their creation. For example, these loans must be made
without recourse for personal liability against the homestead owner(s) or their
spouse(s), absent actual fraud on their part in obtaining the loan, and may be
foreclosed upon only by court order. Further, holders of these loans face
unique legal risks and uncertainties that they do not customarily confront with
equity take-out mortgages in other states. For example, if any of the
requirements that are addressed in the amendment to the Texas Constitution,
such as limitations on fees charged to the borrower, disclosures to the
borrower or matters to be provided for in the closing documents, are not met,
the lien may be invalid. There are also similar risks involved in servicing
these loans, such as the failure to comply with an obligation to the borrower
within a reasonable time after receiving notification from the borrower, that
can result in the forfeiture of all principal and interest due on the mortgage
loan.
Subordination of Subordinate Securities Increases Risk of Loss
A series of certificates may consist of one or more classes of senior
certificates and one or more classes of subordinated certificates. The rights
of the holders of subordinated certificates to receive distributions from the
related trust fund will be subordinated to the rights of the holders of senior
certificates of the same series to receive distributions. The effect of this
subordination generally is that holders of subordinated certificates may
18
experience losses on the underlying mortgage loans before or to a greater
extent than holders of senior certificates. The prospectus supplement for each
series will specify the rights of holders of subordinated certificates in
relation to the holders of senior certificates as well as the extent and
circumstances of any subordination. See "Credit Enhancement--Subordination."
Limited Nature of Ratings
Any rating assigned by a rating agency to a class of certificates will
reflect the rating agency's assessment solely of the likelihood that holders of
certificates of the class will receive payments to which the certificateholders
are entitled under the related pooling and servicing agreement. The rating will
not constitute an assessment of:
. the likelihood that principal prepayments, including those caused by
defaults, on the related mortgage loans will be made;
. the degree to which the rate of prepayments might differ from that
originally anticipated; or
. the likelihood of early optional termination or redemption of the series
of certificates.
The rating will not address the possibility that:
. prepayment at higher or lower rates than anticipated by an investor may
cause the investor to experience a lower than anticipated yield, or
. an investor purchasing a certificate at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
Each prospectus supplement will specify whether any payment to which holders
of offered certificates are entitled is not covered by the applicable rating.
Lowering of Rating on Certificates
The rating of any series of certificates by any applicable rating agency may
be lowered following the initial issuance as a result of:
. the downgrading of the obligations of any applicable credit support
provider,
. losses on the related mortgage loans substantially in excess of the
levels contemplated by the rating agency at the time of its initial
rating analysis, or
. otherwise as a result of the judgment of the applicable rating agency.
If a rating on a series or class of certificates is lowered, the market value
of the certificates and the liquidity of the certificates may be adversely
affected.
None of the depositor, the master servicer, the trustee or any of their
affiliates will have any obligation to replace or supplement any credit support
or to take any other action to maintain any rating of any series of
certificates.
19
Risks of Loss on Balloon Payment Loans if Obligor is Unable to Refinance or
Sell Related Property
Certain of the mortgage loans as of the cut-off date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments, or balloon payments, at their stated maturity. Mortgage
loans with balloon payments involve a greater degree of risk because the
ability of an obligor to make a balloon payment typically will depend upon its
ability either to timely refinance the loan or to timely sell the related
property.
The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including:
. the level of available mortgage interest rates at the time of sale or
refinancing,
. the obligor's equity in the related property,
. the financial condition of the obligor,
. the value of the property,
. tax laws,
. prevailing general economic conditions and
. the availability of credit for single family or multifamily real
properties generally.
Special Federal Tax Considerations Regarding Residual Certificates and FASIT
Certificates
If you hold residual certificates you will be required to report your pro
rata share of the taxable income of the related REMIC as ordinary income, on
your federal income tax return regardless of the amount or timing of your
receipt of cash payments, as described in "Federal Income Tax Consequences--
REMICs." Under certain circumstances, you may have taxable income and tax
liabilities arising from the investment during a taxable year in excess of the
cash received during the period.
As a holder of residual certificates you
. may be limited in your ability to deduct servicing fees and other
expenses of the REMIC, and
. will have to comply with certain transfer restrictions before
transferring your residual certificates.
Because of the special tax treatment of residual certificates, the taxable
income arising in a given year on a residual certificate will not be equal to
the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the residual certificates may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics. If you are thinking of purchasing residual
certificates you should also be aware that applicable regulations prevent the
ability to mark-to-market REMIC
20
residual interests. See "Federal Income Tax Consequences--REMICs." Special tax
considerations relating to FASIT certificates will be discussed in the related
prospectus supplement.
Owners of Book-Entry Certificates Not Entitled to Exercise Rights of Holders of
Certificates
If so provided in the prospectus supplement, one or more classes of the
certificates offered hereby will be initially represented by one or more
certificates registered in the name of Cede & Co., the nominee for DTC, and
will not be registered in the names of the owners or their nominees. Because of
this, unless and until certificates are issued as definitive certificates,
owners will not be recognized by the trustee as "certificateholders" under the
related pooling and servicing agreement. If you own certificates in book-entry
form you will not be able to exercise the rights of a certificateholder
directly, but only indirectly through DTC and its participating organizations.
See "Description of the Certificates--Book-Entry Registration."
Cash Flow Agreements are Subject to Counterparty Risk
The assets of a trust fund may, if specified in the related prospectus
supplement, include agreements, such as interest rate swap, cap, floor or
similar agreements which will require the provider of this type of agreement to
make payments to the trust fund under the circumstances described in the
prospectus supplement. If payments on the certificates of the related series
depend in part on payments to be received under this type of agreement, the
ability of the trust fund to make payments on the certificates will be subject
to the credit risk of the provider of that agreement. The prospectus supplement
for a series of certificates will describe any mechanism, such as the payment
of "breakage fees," which may exist to facilitate replacement of the agreement
upon the default or credit impairment of the related provider. However, there
can be no assurance that any mechanism will result in the ability of the master
servicer to obtain a replacement agreement.
DEFINED TERMS
We define and use capitalized terms in this prospectus to assist you in
understanding the terms of the offered securities and this offering. We define
the capitalized terms used in this prospectus under the caption "Glossary of
Terms" in this prospectus on page 149.
21
THE TRUST FUND
The trust fund for each series will be held by the trustee for the benefit of
the related certificateholders. Each trust fund will consist of a mortgage pool
comprised of mortgage loans together with payments in respect of the mortgage
loans and certain other accounts, obligations or agreements, in each case as
specified in the related prospectus supplement.
The certificates will be entitled to payment from the assets of the related
trust fund or other assets pledged for the benefit of the certificateholders as
specified in the related prospectus supplement and will not be entitled to
payments in respect of the assets of any other trust fund established by the
depositor.
The mortgage loans may be acquired by the depositor, from JVMC under a
mortgage loan purchase agreement between the depositor and JVMC for the related
series. JVMC will in turn have acquired the mortgage loans from one or more
originators or sellers that may be affiliates of the depositor. The mortgage
loans will be conveyed by the depositor to the related trust fund. The
originators may have originated the mortgage loans or acquired the mortgage
loans from originators or other entities. See "Mortgage Loan Program--
Underwriting Standards."
The following is a brief description of the mortgage loans expected to be
included in the trust funds. If specific information respecting the mortgage
loans is not known at the time the related series of certificates initially is
offered, more general information of the nature described below will be
provided in the related prospectus supplement, and final specific information
will be set forth in a Current Report on Form 8-K to be available to investors
on the date of issuance and to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of the certificates.
A schedule of the mortgage loans relating to the series will be attached to the
pooling and servicing agreement delivered to the trustee upon delivery of the
certificates.
Whenever the terms "mortgage pool" and "certificates" are used in this
prospectus, they will be deemed to apply, unless the context indicates
otherwise, to one specific mortgage pool and the certificates relating to a
single trust fund consisting primarily of the mortgage loans in the mortgage
pool. Similarly, the term "Pass-Through Rate" will refer to the Pass-Through
Rate borne by the certificates of a specific series and the term "trust fund"
will refer to one specific trust fund.
The Mortgage Loans
General
The Mortgaged Properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. Mortgage loans with certain loan-to-value ratios and/or certain
principal balances may be covered wholly or partially by Primary Mortgage
Insurance Policies. The existence, extent and duration of any
22
coverage will be described in the applicable prospectus supplement. No Primary
Mortgage Insurance Policy will be required for any home equity loan.
The depositor will cause the mortgage loans comprising each mortgage pool to
be assigned to the trustee named in the related prospectus supplement for the
benefit of the holders of the certificates of the related series.
HFC, as master servicer, will service or cause to be serviced the mortgage
loans, under a pooling and servicing agreement. The master servicer will
receive a fee for these services. See "Mortgage Loan Program" and "The Pooling
and Servicing Agreement." The obligations of the master servicer with respect
to the mortgage loans will consist principally of:
. its contractual servicing obligations under the related pooling and
servicing agreement and
. its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the mortgage loans in
the amounts described under "Description of the Certificates--Advances."
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided herein and in the related prospectus
supplement.
The master servicer may perform any of its obligations under the pooling and
servicing agreement through one or more subservicers, which may include the
originators of the mortgage loans. Despite the existence of subservicing
arrangements, the master servicer will be liable for its servicing duties and
obligations under the pooling and servicing agreement as if the master servicer
alone were servicing the mortgage loans.
Payment Provisions of the Mortgage Loans
The mortgage loans in a mortgage pool will have monthly payment dates as set
forth in the related prospectus supplement. The payment terms of the mortgage
loans to be included in a trust fund will be described in the related
prospectus supplement and may include any of the following features or
combination or other features described in the related prospectus supplement:
(1) Interest may be payable at:
. a fixed rate,
. a rate adjustable from time to time in relation to an index,
. a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
. a rate that otherwise varies from time to time, or
. a rate that is convertible from an adjustable rate to a fixed rate.
23
Changes to an adjustable rate may be subject to:
. periodic limitations,
. maximum rates,
. minimum rates, or
. a combination of these limitations.
Accrued interest may be deferred and added to the principal of a loan for
the periods and under circumstances as may be specified in the related
prospectus supplement. Mortgage loans may provide for the payment of
interest at a rate lower than the specified interest rate borne by the
mortgage loan for a period of time or for the life of the loan, and the
amount of any difference may be contributed from funds supplied by the
seller of the mortgaged property or another source.
(2) Principal may:
. be payable on a level debt service basis to fully amortize the loan
over its term,
. be calculated on the basis of an assumed amortization schedule that
is significantly longer than the original term to maturity,
. be calculated on the basis of an interest rate that is different
from the interest rate on the mortgage loan or may not be amortized
during all or a portion of the original term,
. have payment terms where payment of all or a substantial portion of
the principal may be due on maturity, or
. include interest that has been deferred and added to the principal
balance of the mortgage loan.
(3) Monthly payments of principal and interest may:
. be fixed for the life of the loan,
. increase over a specified period of time, or
. change from period to period.
Mortgage loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts of
monthly payments.
(4) The mortgage loans generally may be prepaid at any time. To the
extent specified in the related prospectus supplement prepayments of
principal will be subject to a prepayment fee, which may:
. be fixed for the life of any mortgage loan or
. decline over time, and
. be prohibited for the life of any mortgage loan or for certain
periods.
Certain mortgage loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection
24
with any subsequent prepayment. Other mortgage loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods.
(5) The loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related mortgaged property. Other
mortgage loans may be assumable by persons meeting the then applicable
underwriting standards.
A trust fund may contain certain Buydown Loans which have Buydown Funds. A
Buydown Fund will be in an amount equal either to the discounted value or full
aggregate amount of future payment subsidies. The underlying assumption of
buydown plans is that the income of the borrower will increase during the
buydown period as a result of normal increases in compensation and of
inflation, so that the borrower will be able to meet the full mortgage
payments at the end of the buydown period. To the extent that this assumption
as to increased income is not fulfilled, the possibility of defaults on
Buydown Loans is increased. The related prospectus supplement will contain
information with respect to any Buydown Loan concerning limitations:
.on the interest rate paid by the borrower initially,
.on annual increases in the interest rate and
.on the length of the buydown period
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the date of the
prospectus supplement and to the extent then specifically known to the
depositor, with respect to the mortgage loans contained in the related
mortgage pool, including:
. the aggregate outstanding principal balance and the average outstanding
principal balance of the mortgage loans as of the applicable cut-off
date,
. the type of property securing the mortgage loans, for example separate
residential properties, individual units in condominiums in buildings
owned by cooperative housing corporations, vacation and second homes, or
other similar real property,
. the original terms to maturity of the mortgage loans,
. the largest principal balance and the smallest principal balance of any
of the mortgage loans,
. the earliest origination date and latest maturity date of any of the
mortgage loans,
. the aggregate principal balance of mortgage loans having loan-to-value
ratios or combined loan-to-value ratios at origination exceeding 80%,
. the maximum and minimum Mortgage Rates, and
. the geographical distribution of the mortgage loans.
25
Loan-to-Value Ratios
The loan-to-value ratio of a mortgage loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related mortgage loan and the denominator of which is the
Collateral Value of the related Mortgaged Property.
The "combined loan-to-value ratio" of any mortgage loan is the fraction,
expressed as a percentage, the numerator of which is the sum of (a) the
original principal balance of the mortgage loan at the date of origination,
which for purposes of the related prospectus supplement includes certain
financed fees and insurance premiums, plus (b) the outstanding balance of the
senior liens, if any, and the denominator of which is the Collateral Value of
the related Mortgaged Property.
For mortgage loans having low original principal balances, the combined loan-
to-value ratios of the mortgage loans will reflect certain judgments of the
lender's underwriters with respect to the value of the Mortgaged Property made
at the time the mortgage loans were originated or acquired. See "Mortgage Loan
Program--Underwriting Standards."
Single Family and Cooperative Loans
Mortgage loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first, second
or more junior liens on one- to four-family residential properties or other
mortgage loans specified in the related prospectus supplement. If so specified,
the mortgage loans may include Cooperative Loans secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling
units in the Cooperatives' buildings. These loans may be loans that are not
insured or guaranteed by any governmental agency or loans insured by the FHA or
partially guaranteed by the VA, as specified in the related prospectus
supplement.
The Mortgaged Properties relating to single family mortgage loans will
consist of
. detached or semi-detached one-family dwelling units,
. two- to four-family dwelling units,
. townhouses,
. rowhouses,
. individual condominium units,
. individual units in planned unit developments, and
. certain other dwelling units.
The Mortgaged Properties may include:
. vacation homes
. second homes,
. investment properties and
. leasehold interests.
26
In the case of leasehold interests, the term of the leasehold will exceed the
scheduled maturity of the mortgage loan by at least five years, or other term
specified in the related prospectus supplement. Certain mortgage loans may be
originated or acquired in connection with corporate programs, including
employee relocation programs. In limited instances, a borrower who uses the
dwelling unit as a primary residence may also make some business use of the
property.
Home Equity Loans
As described more fully in the related prospectus supplement, the mortgage
loans constituting a trust fund may comprise a pool of home equity loans, which
includes closed-end and/or revolving home equity loans, or certain balances of
these loans. Home equity loans are mortgage loans made for purposes that
include:
. purchase money transactions,
. cash-out and no-cash-out refinancings,
. home improvements and
. construction-to-permanent financing.
The Mortgaged Properties securing the home equity loans may constitute:
. single-family dwellings,
. mobile and manufactured housing and
. in limited cases, other types of residential property as described in
the related prospectus supplement.
As more fully described in the related prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving credit line loans.
Interest on each revolving credit line loan, excluding introductory rates
offered from time to time during promotional periods, may be computed and
payable monthly on the average daily outstanding principal balance of the loan.
From time to time prior to the expiration of the related draw period specified
in a revolving credit line loan, principal amounts on the revolving credit line
loan may be drawn down, up to a maximum amount as set forth in the related
prospectus supplement, or repaid. If specified in the related prospectus
supplement, new draws by borrowers under the revolving credit line loans will
automatically become part of the trust fund described in the prospectus
supplement. As a result, the aggregate balance of the revolving credit line
loans will fluctuate from day to day as new draws by borrowers are added to the
trust fund and principal payments are applied to the balances and the amounts
will usually differ each day, as more specifically described in the related
prospectus supplement. Under certain circumstances, under a revolving credit
line loan, a borrower may, during the related draw period, choose an interest
only payment option, during which the borrower is obligated to pay only the
amount of interest which accrues on the loan during the billing cycle, and may
also elect to pay all or a portion of the principal. An interest only payment
option may terminate at the end of the related draw period, after which the
borrower must begin paying at least a minimum monthly portion of the average
outstanding principal balance of the loan.
27
Substitution of Mortgage Loans
Substitution of mortgage loans will be permitted in the event of breaches of
representations and warranties with respect to any original mortgage loan or in
the event the documentation with respect to any mortgage loan is determined by
the trustee or a custodian appointed by the trustee to be incomplete. The
period during which the substitution will be permitted generally will be
indicated in the related prospectus supplement. The related prospectus
supplement will describe any other conditions upon which mortgage loans may be
substituted for mortgage loans initially included in the trust fund.
Cash Flow Agreements
If so provided in the related prospectus supplement, the trust fund may
include Cash Flow Agreements. The principal terms of any Cash Flow Agreement
including without limitation, provisions relating to the timing, manner and
amount of payments thereunder and provisions relating to the termination of
that agreement, will be described in the prospectus supplement for the related
series. In addition, the related prospectus supplement will provide certain
information with respect to the obligor under any Cash Flow Agreement.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement,
substantially all of the net proceeds from the sale of each series of
certificates will be used by the depositor for the purchase of the mortgage
loans represented by the certificates of the series or to reimburse amounts
previously used to effect such a purchase, the costs of carrying the related
mortgage loans until the sale of the certificates and other expenses connected
with pooling the related mortgage loans and issuing the certificates. The
depositor expects to sell certificates in series from time to time, but the
timing and amount of offerings of certificates will depend on a number of
factors, including, among others, the volume of mortgage loans acquired by the
depositor, prevailing interest rates, availability of funds and general market
conditions.
28
THE DEPOSITOR
JV Capital Trust is a business trust formed under the laws of the State of
Delaware under a trust agreement between JV Mortgage Capital, L.P., a Delaware
limited partnership and Wilmington Trust Company, in its sole capacity as owner
trustee. The general partner of JV Mortgage Capital, L.P. is JV Mortgage
Capital, Inc. JV Mortgage Capital, Inc. is jointly owned by an affiliate of
First Union Securities, Inc. and an affiliate of the master servicer. The
depositor's address JV Capital Trust is c/o Wilmington Trust Company, Rodney
Square North, Wilmington, Delaware 19890. Its telephone number is
(302) 651-1000.
As described herein under "Mortgage Loan Program--Representations and
Warranties; Repurchases," the only obligations of the depositor with respect to
a series of certificates will be under certain limited representations and
warranties and limited undertakings to repurchase or substitute mortgage loans
under certain circumstances. The depositor will have no ongoing servicing
obligations or responsibilities with respect to any mortgage pool. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
Neither the depositor nor any of its affiliates will insure or guarantee the
certificates of any series.
THE MASTER SERVICER
HFC was incorporated in Delaware in 1925, as successor to an enterprise which
traces its origin through the same ownership to an office established in 1878.
HFC will be responsible for acting as the master servicer for the mortgage
loans. HFC is a subsidiary of Household International, Inc. The address of its
principal executive office is 2700 Sanders Road, Prospect Heights, Illinois
60070. Its telephone number is (847) 564-5000.
HFC and its subsidiaries offer a diversified range of financial services. The
principal products of HFC's consumer financial services business is the making
or purchasing of cash loans, including home equity loans, auto finance loans,
tax refund anticipation loans and unsecured credit advances, including
revolving and closed-end personal loans. HFC also offers MasterCard,* VISA* and
private label credit cards to consumers in the United States. Loans are made
through branch office lending, direct marketing and telemarketing as well as
through dealer networks and retail stores.
In conjunction with its consumer finance operations and where applicable laws
permit, HFC makes available to customers credit life, credit accident, health
and disability insurance. This insurance is generally directly written by or
reinsured with its affiliates.
As of June 30, 1999, HFC had approximately $45.7 billion in total assets,
approximately $40.0 billion in total liabilities and approximately $5.7 billion
in shareholder's equity.
- --------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
29
MORTGAGE LOAN PROGRAM
The mortgage loans for a series will have been purchased by the depositor
from JVMC, which in turn will have acquired the mortgage loans from one or more
originators, which may be affiliates of the depositor. The mortgage loans so
acquired by the depositor will have been originated in accordance with the
underwriting criteria specified below under "--Underwriting Standards or other
standards described in the related prospectus supplement."
Underwriting Standards
JVMC's origination volume is generated primarily from partners and
correspondents selling loans to JVMC through bulk sale. Generally, JVMC only
chooses to purchase loans that meet its underwriting guidelines. Under a
service contract, HFC provides underwriting review services to JVMC. HFC
reviews loans prior to purchase by JVMC to verify the loans meet JVMC's
underwriting guidelines. On larger bulk sales, HFC may employ sampling.
JVMC's underwriting guidelines are primarily intended to assess:
. the borrower's ability to repay the loan,
. the value of the mortgaged property, and
. the adequacy of the property as collateral for the mortgage loan.
In underwriting a mortgage loan, JVMC considers, among other things:
. a mortgagor's credit history,
. Debt Ratio and
. the type and use of the mortgaged property.
Each prospective borrower completes an application that includes information
with respect to the applicant's liabilities, income, credit history, employment
history, and personal information. JVMC requires a credit report on each
applicant from a credit reporting company. The report typically contains
information relating to matters such as credit history with local and national
merchants and lenders, installment debt payments, and any record of defaults,
bankruptcies, repossessions, or judgments. In addition, an employment
verification may be requested from an independent source, typically the
borrower's employer, or, in lieu of this, verbal verification is obtained if
the applicant has supplied a copy of a current pay stub along with personal tax
returns. Self-employed applicants typically submit the last two years'
employment history and business tax returns. Under certain loan programs, the
borrower's income is not verified. These programs generally have lower loan-to-
value requirements.
Upon receipt of the application package, a lender usually conducts its own
review of the application package and may, in some instances, obtain additional
information
30
concerning the prospective borrower prior to approving the loan. Along with
obtaining a credit report, the lender may solicit a written verification of the
applicant's existing first mortgage balance, if any, and payment history from
the first mortgage lender, if appropriate. If the lender does not respond in
writing, verbal verification is attempted and the applicant generally is
required to submit the prior year's mortgage statements which generally reflect
a monthly payment history.
Properties are limited to one- to four-family and the value is based upon:
. an appraisal, if any, performed by a qualified independent appraiser,
. a drive by evaluation, or
. a statistical evaluation, which is an appraisal that uses a statistical
model to estimate the value of the property.
For properties valued by an appraisal, the appraisers inspect the interior
and/or exterior and appraise the subject of property and report the property
condition. Following each inspection, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraised Standards Board of the Appraisal Foundation and are generally on
forms acceptable to Fannie Mae and Freddie Mac.
Unless otherwise specified in the related prospectus supplement, the mortgage
loans are secured by a mortgage on property located in any of the 50 states,
the District of Columbia, Guam, Puerto Rico or any other territory of the
United States. Mortgage loans may be secured by leases on real property.
Generally, a loan will be secured by a lease only if the use of leasehold
estates as security for mortgage loans is common and customary in the area, the
lease is not subject to any prior lien that could result in termination of the
lease and the term of the lease ends five years beyond the maturity date of the
related mortgage loan.
Unless otherwise provided in the applicable prospectus supplement, all
mortgage loans will be covered by an appropriate standard form American Land
Title Association title insurance policy, or a substantially similar policy or
an attorney's title opinion.
If so specified in the applicable prospectus supplement, mortgage loans may
be Subsidy Loans. Unless otherwise specified in the applicable prospectus
supplement, subsidy payments will be placed in a custodial account by the
master servicer. Despite the existence of a subsidy program, a mortgagor
remains primarily liable for making all scheduled payments on a Subsidy Loan
and for all other obligations provided for in the related mortgage note and
mortgage loan.
If so specified in the applicable prospectus supplement, the trust fund may
contain Buydown Loans under which the monthly payments made by the mortgagor
during the early years of the mortgage loan will be less than the scheduled
monthly payments on the mortgage loan. The resulting difference in payment will
be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source, including the originator of the mortgage
loan, generally on a present value basis, and, if so specified in the related
prospectus supplement, placed in a Buydown Fund by the master servicer.
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If so specified in the applicable prospectus supplement, the trust fund may
include Balloon Loans. Unless otherwise specified in the applicable prospectus
supplement, the borrower of a Balloon Loan will be obligated to pay the entire
outstanding principal balance of the Balloon Loan at the end of the related
period specified in the Balloon Loan.
Certain of the types of mortgage loans that may be included in a trust fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain mortgage loans may provide for
escalating or variable payments by the mortgagor or obligor. These types of
mortgage loans are underwritten on the basis of a judgment that mortgagors or
obligors will have the ability to make monthly payments required initially. In
some instances, however, a mortgagor's or obligor's income may not be
sufficient to permit continued loan payments as payments increase. These types
of mortgage loans may also be underwritten primarily upon the basis of loan-to-
value ratios or other favorable credit factors.
Summaries of the Underwriting Programs
The following is a summary of the underwriting programs of JVMC. The related
prospectus supplement will set forth the distribution of the mortgage loans
among the underwriting programs as of the related cut-off date.
Grade A
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 36 months is acceptable if
there are compensating factors, evidence of a good re-establishment of credit
and the Debt Ratio is no greater than 40% for loans with greater than 90%
LTV/CLTV. No unpaid collections, chargeoffs or judgments in the previous 24
months are acceptable under this underwriting program. Mortgage payment history
may reflect that there are no 30-day delinquencies during the most recent 12-
month period.
In addition, if the LTV/CLTV is less than or equal to 90%, then:
(1) no more than two major consumer credit delinquencies of 30 days and
some minor consumer credit delinquencies of 30 days may have occurred
in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 650.
If the LTV/CLTV is greater than 90%, then:
(1) no major consumer credit delinquencies of 30 days and some minor
consumer credit delinquencies of 30 days may have occurred in the most
recent 12-month period or
(2) the borrower must have a Credit Score of at least 650.
32
2. LTV/CLTV generally conforms to the following criteria:
Maximum
LTV Maximum
for CLTV
First for Second
Underwriting Criteria Liens Liens
--------------------- ------- ----------
Fully Documented........................................ 100% 100%
Non-Income Qualification or Alternate Documentation..... 85% N/A
Non-Income Verification................................. 80% N/A
Non-Owner Occupancy..................................... 80% 85%
Non-Owner Occupancy and Non-Income Qualification or Non-
Owner Occupancy and Alternate Documentation............ 75% N/A
Non-Owner Occupancy and Non-Income Verification......... 70% N/A
Second Homes............................................ 85% 90%
Double Wide Mobile Homes................................ 80% 80%
3. The maximum Debt Ratio is:
(1) 45% for borrowers with an annual income less than or equal to $100,000
and
(2) 50% for borrowers with an income greater than $100,000.
Grade A-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 36 months is acceptable if
there are compensating factors, evidence of a good reestablishment of credit
and the Debt Ratio is no greater than 40% for loans with greater than 90%
LTV/CLTV. Unpaid collections, chargeoffs or judgments up to $500 in the
previous 24 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there is no more than one 30-day delinquency
during the most recent 12-month period.
In addition, if the LTV/CLTV is less than or equal to 90%, then:
(1) no more than five major consumer credit delinquencies of 30 days and
some minor consumer credit delinquencies of 30 days may have occurred
in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 635.
If the LTV/CLTV is greater than 90%, then:
(1) no more than two major consumer credit delinquencies of 30 days and
some minor consumer credit delinquencies of 30 days may have occurred
in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 650.
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2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 100% 100%
Non-Income Qualification or Alternate Documentation... 85% N/A
Non-Income Verification............................... 75% N/A
Non-Owner Occupancy................................... 75% 85%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... 75% N/A
Non-Owner Occupancy and Non-Income Verification....... 65% N/A
Second Homes.......................................... 80% 90%
Double Wide Mobile Homes.............................. 80% 80%
3. The maximum Debt Ratio is:
(1) 45% for borrowers with an annual income less than or equal to $100,000
and
(2) 50% for borrowers with an income greater than $100,000.
Grade B
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $1,000 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than two 30-day
delinquencies during the most recent 12-month period.
In addition,
(1) (a) no more than five major consumer credit delinquencies of 30 days,
(b) no more than two major consumer credit delinquencies of 60 days,
and (c) some minor consumer credit delinquencies of 60 days, may have
occurred in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 615.
2. LTV/CLTV generally conforms to the following criteria:
Maximum
LTV Maximum
for LTV
First for Second
Underwriting Criteria Liens Liens
--------------------- ------- ----------
Fully Documented........................................ 85% 90%
Non-Income Qualification or Alternate Documentation..... 75% N/A
Non-Income Verification................................. 70% N/A
Non-Owner Occupancy..................................... 70% 75%
Non-Owner Occupancy and Non-Income Qualification or Non-
Owner Occupancy and Alternate Documentation............ 65% N/A
Non-Owner Occupancy and Non-Income Verification......... 60% N/A
Second Homes............................................ 75% 80%
Double Wide Mobile Homes................................ 75% 75%
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3. The maximum Debt Ratio is:
(1) 45% for borrowers with an annual income less than or equal to $100,000
and
(2) 50% for borrowers with an income greater than $100,000.
Grade B-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $1,500 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than four 30-day
delinquencies and one 60-day delinquency during the most recent 12-month
period.
In addition,
(1) (a) no more than three major consumer credit delinquencies of 60 days,
(b) no more than one major consumer credit delinquency of 90 days, and
(c) some minor consumer credit delinquencies of 90 days, may have
occurred in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 585.
2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 80% 80%
Non-Income Qualification or Alternate Documentation... 70% N/A
Non-Income Verification............................... 65% N/A
Non-Owner Occupancy................................... 65% 65%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... 60% N/A
Non-Owner Occupancy and Non-Income Verification....... 55% N/A
Second Homes.......................................... 70% 70%
Double Wide Mobile Homes.............................. 70% 70%
3. The maximum Debt Ratio is 50% for all borrowers.
Grade C
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $2,000 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than two 60-day
delinquencies during the most recent 12-month period.
35
In addition,
(1) no more than two major consumer credit delinquencies of 90 days and
some minor consumer credit delinquencies of 120 days, may have
occurred in the most recent 12-month period or
(2) the borrower must have a Credit Score of at least 570.
2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 75% 70%
Non-Income Qualification or Alternate Documentation... 65% N/A
Non-Income Verification............................... N/A N/A
Non-Owner Occupancy................................... 60% 55%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... N/A N/A
Non-Owner Occupancy and Non-Income Verification....... N/A N/A
Second Homes.......................................... 65% 60%
Double Wide Mobile Homes.............................. 65% 60%
3. The maximum Debt Ratio is 50% for all borrowers.
Grade C-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 12 months with some or no
re-establishment of credit is acceptable. Unpaid collections, chargeoffs or
judgments up to $2,500 in the previous 12 months are acceptable under this
underwriting program. Mortgage payment history may reflect that there is no
more than one 90-day delinquency during the most recent 12-month period.
In addition,
(1) no major consumer credit delinquencies of 120 days and some minor
consumer credit delinquencies of 120 days may have occurred in the
most recent 12-month period or
(2) the borrower must have a Credit Score of at least 555.
36
2. Loan-to-value ratio generally conforms to the following criteria:
Maximum
LTV for
First
Underwriting Criteria Liens
--------------------- -------
Fully Documented................................................... 70%
Non-Income Qualification or Alternate Documentation................ 60%
Non-Income Verification............................................ N/A
Non-Owner Occupancy................................................ 55%
Non-Owner Occupancy and Non-Income Qualification or Non-Owner
Occupancy and Alternate Documentation............................. N/A
Non-Owner Occupancy and Non-Income Verification.................... N/A
Second Homes....................................................... 60%
Double Wide Mobile Homes........................................... 60%
3. The maximum Debt Ratio is 50% for all borrowers.
Qualifications of Originators
Unless otherwise specified in the related prospectus supplement, each
originator must be an institution experienced in originating mortgage loans of
the type contained in the related mortgage pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate those mortgage loans.
Representations and Warranties; Repurchases
The depositor will, with respect to each mortgage loan, make certain
representations and warranties, as of a specified date to the trustee on behalf
of the certificateholders. These representations and warranties generally
include, among other things, that:
. immediately prior to the transfer and assignment of the mortgage loans,
the depositor had good title to, and was the sole owner of, each
mortgage loan and there had been no other sale or assignment,
. to the best knowledge of the depositor, as of the date of transfer, the
mortgage loans are subject to no offsets, defenses or counterclaims,
. each mortgage loan at the time it was made complied in all material
respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws,
. a lender's policy of title insurance or an attorney's title opinion was
issued on the date of the origination of each mortgage loan and each
policy is valid and remains in full force and effect,
. as of the date of transfer, each mortgage subject to the pooling and
servicing agreement is a valid lien on the related Mortgaged Property;
subject only to (a) permitted senior liens on the Mortgaged Property and
(b) the exceptions to title set forth in the related title insurance
policy or attorney's opinion, which exceptions are generally acceptable
to mortgage lending companies, and other exceptions to
37
which similar properties are commonly subject and which do not
individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by the mortgage; and to
the best knowledge of the depositor, the property is free of material
damage and is in good repair,
. the payment status of the mortgage loan, and
. with respect to each mortgage loan, if the Mortgaged Property is located
in an area identified by the Federal Emergency Management Agency as
having special flood hazards and subject in certain circumstances to the
availability of flood insurance under the National Flood Insurance Act
of 1968, as amended, the Mortgaged Property is covered by flood
insurance.
The master servicer or the trustee will promptly notify the depositor of any
breach of any representation or warranty made by it in respect of a mortgage
loan, without regard to any qualification as to the depositor's knowledge,
which materially and adversely affects the interests of the certificateholders
in the mortgage loan. Unless otherwise specified in the related prospectus
supplement, if the depositor cannot cure the breach within a specified period
following the date it was notified of the breach, then the depositor will be
obligated to repurchase the mortgage loan from the trust fund at the Purchase
Price. If so provided in the prospectus supplement for a series, the depositor,
rather than repurchase a mortgage loan as to which a breach has occurred, will
have the option, within a specified period after initial issuance of the series
of certificates, to cause the removal of the mortgage loan from the trust fund
and substitute in its place one or more other mortgage loans, as applicable, in
accordance with the standards described in the related prospectus supplement.
Repurchase or substitution of the mortgage loan by the depositor are the sole
remedies available to the trustee and the certificateholders upon the breach of
a representation or warranty in respect of a mortgage loan.
The mortgage loan purchase agreement will provide the depositor with remedies
against JVMC for breaches of representations and warranties made by the
depositor with respect to the mortgage loans under the pooling and servicing
agreement.
The master servicer will not be obligated to purchase a mortgage loan if the
depositor defaults on its obligation to do so, and no assurance can be given
that the depositor will carry out its repurchase obligations with respect to
the mortgage loans. The failure of the depositor to repurchase a mortgage loan
as to which a breach of a representation or warranty relates to the status of
the mortgage loan as a "qualified mortgage" within the meaning of Code Section
860G(a)(3) may cause the related trust fund to be disqualified as a REMIC.
DESCRIPTION OF THE CERTIFICATES
Each series of certificates will be issued under a pooling and servicing
agreement among the depositor, the master servicer and the trustee for the
benefit of the holders of the
38
certificates of the series. The following summaries describe the material
provisions that may appear in each pooling and servicing agreement. The
prospectus supplement for a series of certificates will describe any provision
of the pooling and servicing agreement relating to the series that materially
differs from the description contained in this prospectus. The provisions of
each pooling and servicing agreement will vary depending upon the nature of the
certificates to be issued thereunder and the nature of the related trust fund.
A form of the pooling and servicing agreement is an exhibit to the Registration
Statement of which this prospectus is a part. The summaries do not purport to
be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the pooling and servicing agreement for
each series of certificates and the applicable prospectus supplement. The
depositor will provide a copy of the pooling and servicing agreement, without
exhibits, relating to any series without charge upon written request of a
holder of record of a certificate of the series addressed to JV Capital Trust,
c/o Wilmington Trust Company, 1100 North Market Street, Rodney Square North,
Wilmington, DE 19890.
General
Unless otherwise specified in the prospectus supplement, the certificates of
each series will be issued in either fully-registered or book-entry form, in
the authorized denominations specified in the related prospectus supplement,
will evidence specified beneficial ownership interests in the related trust
fund created under each pooling and servicing agreement and will not be
entitled to payments in respect of the assets included in any other trust fund
established by the depositor. The certificates will not represent obligations
of the depositor, master servicer, trustee or any affiliate of any party. The
mortgage loans will not be insured or guaranteed by any governmental entity or
other person, unless otherwise specified in the related prospectus supplement.
Each trust fund will consist of, to the extent provided in the pooling and
servicing agreement:
. the mortgage loans, that from time to time are subject to the related
pooling and servicing agreement, exclusive of any Retained Interest;
. the assets as from time to time are required to be deposited in the
related Collection Account;
. property which secured a mortgage loan and which is acquired on behalf
of the certificateholders by foreclosure or deed in lieu of foreclosure;
and
. any Primary Mortgage Insurance Policies, FHA Insurance and VA
Guarantees, and any other insurance policies or other forms of credit
enhancement required to be maintained under the pooling and servicing
agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following:
. reinvestment income on payments received on the mortgage loans,
. Reserve Fund,
. Mortgage Pool Insurance Policy,
. Special Hazard Insurance Policy,
39
. Bankruptcy Bond,
. one or more Letters of Credit,
. Surety Bond,
. Limited Guarantees or
. any other similar instruments or agreements.
Each series of certificates will be issued in one or more classes. Each class
of certificates of a series will evidence beneficial ownership of a specified
percentage which may be 0% or portion of future interest payments and a
specified percentage or portion of future principal payments on the mortgage
loans in the related trust fund. A series of certificates may include one or
more classes that are senior or subordinate in right to payment to one or more
other classes of certificates of the series. Certain series or classes of
certificates may be covered by insurance policies, Surety Bonds or other forms
of credit enhancement, in each case as described herein and in the related
prospectus supplement. One or more classes of certificates of a series may be
entitled to receive principal distributions, with disproportionate, nominal or
no interest distributions or to interest distributions, with disproportionate,
nominal or no principal distributions or any combination of these
distributions. Distributions on one or more classes of a series of certificates
may be made prior to one or more other classes, after the occurrence of
specified events, in accordance with a schedule or formula, on the basis of
collections from designated portions of the mortgage loans in the related trust
fund, or on a different basis, in each case as specified in the related
prospectus supplement. The timing, amounts, sequential order and priority of
payment of the distributions may vary among classes or over time as specified
in the related prospectus supplement.
Distributions of principal and/or interest on the related certificates will
be made by the trustee on each Distribution Date in proportion to the
percentages specified in the related prospectus supplement or in any manner as
is specified in the related prospectus supplement. Distributions will be made
to the certificateholders in whose names the certificates are registered on the
Record Date. Distributions will be made by check or money order mailed to the
persons entitled thereto at the address appearing in the Certificate Register
or, if specified in the related prospectus supplement, in the case of
certificates that are of a certain minimum denomination, upon written request
by the certificateholder, by wire transfer or by other means as are described
therein; provided, however, that the final distribution in retirement of the
certificates will be made only upon presentation and surrender of the
certificates at the office or agency of the trustee or other person specified
in the notice to certificateholders of the final distribution.
The certificates will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of certificates of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
40
Distributions on Certificates
General
In general, the method of determining the amount of distributions on a
particular series of certificates will depend on the type of credit support, if
any, that is used with respect to the series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the certificates of a particular series. The
prospectus supplement for each series of certificates will describe the method
to be used in determining the amount of distributions on the certificates of
the series. Distributions allocable to principal of and interest on the
certificates will be made by the trustee out of, and only to the extent of,
funds in the related Collection Account, including any funds transferred from
any Reserve Fund. As between certificates of different classes and as between
distributions of principal and interest, distributions made on any Distribution
Date will be applied as specified in the related prospectus supplement.
Distributions to any class of certificates will be made pro rata to all
certificateholders of that class or any other manner as is described in the
related prospectus supplement.
Available Distribution Amount
All distributions on the certificates of each series on each Distribution
Date will be made from the Available Distribution Amount, in accordance with
the terms described in the related prospectus supplement and specified in the
pooling and servicing agreement.
Distributions of Interest
Interest will accrue on the aggregate Certificate Balance, or, in the case of
certificates entitled only to distributions allocable to interest, the
aggregate notional amount, of each class of certificates entitled to interest
at the Pass-Through Rate or as otherwise described in the prospectus supplement
from the date, and for the periods, specified in the prospectus supplement. To
the extent funds are available therefor, interest accrued during each specified
period on each class of certificates entitled to interest, other than Accrual
Certificates, will be distributable on the Distribution Dates specified in the
related prospectus supplement until the aggregate Certificate Balance of the
certificates of the class has been distributed in full or, in the case of
certificates entitled only to distributions allocable to interest, until the
aggregate notional amount of the certificates is reduced to zero or for the
period of time designated in the related prospectus supplement. The Certificate
Balance of each certificate outstanding from time to time represents the
maximum amount that the holder is entitled to receive in respect of principal
from future cash flow on the assets in the related trust fund. Distributions
allocable to interest on each certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of the
certificate or as otherwise described in the prospectus supplement. The
notional amount of a certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
41
With respect to any class of Accrual Certificates, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Balance of
the class of certificates on that Distribution Date. Distributions of interest
on each class of Accrual Certificates will commence only at the time or after
the occurrence of certain events specified in the related prospectus
supplement. Prior to the time, the beneficial ownership interest of the class
of Accrual Certificates in the trust fund, as reflected in the aggregate
Certificate Balance of the class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on the class of
Accrual Certificates during the preceding interest accrual period but that was
not required to be distributed to the class on the Distribution Date. Any class
of Accrual Certificates will thereafter accrue interest on its outstanding
Certificate Balance as so adjusted.
Distributions of Principal
The aggregate Certificate Balance of any class of certificates entitled to
distributions of principal will be the aggregate original Certificate Balance
of the class of certificates specified in the prospectus supplement, reduced by
all distributions reported to the holders of the certificates as allocable to
principal and
. in the case of Accrual Certificates, increased by all interest accrued
but not then distributable on the Accrual Certificates and
. in the case of adjustable rate certificates, if so specified in the
related prospectus supplement, subject to the effect of negative
amortization or other amount as is specified in the related prospectus
supplement.
The related prospectus supplement will specify the method by which the amount
of principal to be distributed on the certificates on each Distribution Date
will be calculated and the manner in which the amount will be allocated among
the classes of certificates entitled to distributions of principal. A class of
interest-only certificates will not be entitled to distributions of principal
and will have a notional amount on which interest will accrue.
If so provided in the related prospectus supplement, one or more classes of
senior certificates will be entitled to receive all or a disproportionate
percentage of Principal Prepayments in the percentages and under the
circumstances or for the periods specified in the prospectus supplement. Any
allocation of Principal Prepayments to the class or classes of
certificateholders will have the effect of accelerating the amortization of the
senior certificates while increasing the relative interests evidenced by the
subordinated certificates in the trust fund. Increasing the interests of the
subordinated certificates relative to that of the senior certificates is
intended to preserve the availability of the subordination provided by the
subordinated certificates. See "Credit Enhancement--Subordination."
Unscheduled Distributions
To the extent specified in the related prospectus supplement relating to a
series of certificates which have less frequent than monthly Distribution
Dates, the certificates will be subject to receipt of distributions before the
next scheduled Distribution Date under the
42
circumstances and in the manner described below and in the prospectus
supplement. If applicable, the trustee will be required to make the unscheduled
distributions on the day and in the amount specified in the related prospectus
supplement if, due to substantial payments of principal, including Principal
Prepayments, on the mortgage loans, the trustee or the master servicer
determines that the funds available or anticipated to be available from the
Collection Account and, if applicable, any Reserve Fund, may be insufficient to
make required distributions on the certificates on the Distribution Date. The
amount of any the unscheduled distribution that is allocable to principal will
not exceed the amount that would otherwise have been required to be distributed
as principal on the certificates on the next Distribution Date except to the
extent specified in the related prospectus supplement. All unscheduled
distributions will include interest at the applicable Pass-Through Rate, if
any, on the amount of the unscheduled distribution allocable to principal for
the period and to the date specified in the prospectus supplement except to the
extent specified in the related prospectus supplement. See "Yield and
Prepayment Considerations."
All distributions allocable to principal in any unscheduled distribution will
be made in the same priority and manner as distributions of principal on the
certificates would have been made on the next Distribution Date, and with
respect to certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis or in any other manner as is
specified in the related prospectus supplement.
Notice of any unscheduled distribution will be given by the trustee prior to
the date of the distribution.
Categories of Classes of Certificates
The certificates of any series may be comprised of one or more classes. The
classes, in general, fall into different categories. The following chart
identifies certain of the more typical categories. The prospectus supplement
for a series of certificates may identify the classes which comprise a series
by reference to the following categories or another category specified in the
applicable prospectus supplement.
43
PRINCIPAL TYPES
Categories Of Classes
---------------------
Accretion Directed Class.......... A class that receives principal payments
from amounts that would otherwise be
distributed as interest on specified
Accrual Classes. The principal payments
may be in lieu of or in addition to
principal payments from principal receipts
on the mortgage loans for the related
series.
Companion Class (also sometimes
referred to as a Support A class that is entitled to receive
Class).......................... principal payments on any Distribution
Date only if scheduled payments have been
made on specified Planned Amortization
Classes, Targeted Amortization Classes
and/or Scheduled Amortization Classes.
Component Class................... A class consisting of two or more
specified components as described in the
applicable prospectus supplement. The
components of a Component Class may have
different principal and/or interest
payment characteristics but together
constitute a single class and do not
represent severable interests. Each
component of a Component Class may be
identified as falling into one or more
categories in this chart.
Lockout Class..................... A senior class that is "locked out" of or
is designed not to participate in or to
participate to a limited extent in, for a
specified period, the receipt of (1)
principal prepayments on the mortgage
loans that are allocated
disproportionately to the senior classes
of the series as a group under a "shifting
interest" structure and/or (2) scheduled
principal payments on the mortgage loans
that are allocated to the senior classes
as a group. A Lockout Class will typically
not be entitled to receive, or will be
entitled to receive only a restricted
portion of, distributions of principal
prepayments and/or scheduled principal
payments, as applicable, for a period of
several years, during which time all or a
portion of the principal payments that it
would otherwise be entitled to receive in
the absence of a "lockout" structure will
be distributed in reduction of the
Certificate Balances of other senior
classes. Lockout Classes are designed to
minimize weighted average life volatility
during the lockout period.
Notional Amount Class............. A class having no Certificate Balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of interest
distributions.
44
Categories Of Classes
---------------------
Pass Through Class................ A Senior Class that is entitled to receive
a specified percentage of the principal
payments that are distributable to the
Senior Classes or applicable group of
Senior Classes, other than any Ratio Strip
Class, in the aggregate on a Distribution
Date and that is not designated as a
Sequential Pay Class.
Planned Amortization Class (also
sometimes referred to as a PAC)..
A class that is designed to receive
principal payments using a predetermined
Certificate Balance schedule derived by
assuming two constant prepayment rates for
the underlying mortgage loans. These two
rates are the endpoints for the
"structuring range" for the Planned
Amortization Class. The Planned
Amortization Classes in any series of
certificates may be subdivided into
different categories, such as Planned
Amortization Class I (PAC I) Planned
Amortization Class II (PAC II) and so
forth, derived using different structuring
ranges. A PAC is designed to provide
protection against volatility of weighted
average life if prepayments occur at a
constant rate within the structuring
range.
Ratio Strip Class................. A class that is entitled to receive a
constant proportion, or "ratio strip," of
the principal payments on the underlying
mortgage loans.
Scheduled Amortization Class (also
sometimes referred to as a
Scheduled Class)................. A class that is designed to receive
principal payments using a predetermined
Certificate Balance schedule but is not
designated as a Planned Amortization Class
or Targeted Amortization Class. The
schedule is generally derived by assuming
either two constant prepayment rates or a
single constant prepayment rate for the
underlying mortgage loans but may be
derived using a different methodology. In
the case of two constant rates, the two
rates are the endpoints for the
"structuring range" for the Scheduled
Amortization Class and the range generally
is narrower than that for a Planned
Amortization Class. Typically, the Support
Class(es) for the applicable series of
certificates generally will represent a
smaller percentage of the Scheduled
Amortization Class than a Support Class
generally would represent in relation to
45
Categories Of Classes
---------------------
a Planned Amortization Class or a Targeted
Amortization Class. A Scheduled
Amortization Class is generally less
sensitive to weighted average life
volatility as a result of prepayments than
a Support Class but more sensitive than a
Planned Amortization Class or a Targeted
Amortization Class.
Senior Class...................... A class that is entitled to receive
payments of principal and interest on each
Distribution Date prior to the classes of
Subordinated Certificates.
Sequential Pay Class.............. A class that is entitled to receive
principal payments in a prescribed
sequence, that does not have a
predetermined Certificate Balance schedule
and that, in most cases, is entitled to
receive payments of principal continuously
from the first Distribution Date on which
it receives principal until it is retired.
Sequential Pay Classes may receive
principal payments concurrently with one
or more other Sequential Pay Classes. A
single class that is entitled to receive
principal payments before or after other
classes in the same series of certificates
may be identified as a Sequential Pay
Class.
Subordinated Class................ A class that is entitled to receive
payments of principal and interest on each
Distribution Date only after the Senior
Certificates and certain classes of
Subordination Certificates with higher
priority of distributions have received
their full principal and interest
entitlements.
Super Senior Class................ A Senior Class that will not bear its
share of certain losses after the classes
of Subordinated Certificates are no longer
outstanding for so long as one or more
specified classes of Senior Certificates
are outstanding.
Super Senior Support Class........ A Senior Class that bears certain losses
allocated to one or more Super Senior
Classes.
Targeted Amortization Class (also
sometimes referred to as a TAC)..
A class that is designed to receive
principal payments using a predetermined
Certificate Balance schedule derived by
assuming a single constant prepayment rate
for the underlying mortgage loans. A TAC
is designed to provide some protection
against shortening of weighted average
life if prepayments occur at a rate
exceeding the assumed constant prepayment
rate used to derive the Certificate
Balance schedule of the class.
46
INTEREST TYPES
Accrual Class..................... A class that accretes the amount of
accrued interest otherwise distributable
on the class, which amount will be added
as principal to the Certificate Balance of
the class on each applicable Distribution
Date. The accretion may continue until
some specified event has occurred or until
the Accrual Class is retired.
Fixed Rate Class.................. A class with an interest rate that is
fixed throughout the life of the classes.
Floating Rate Class............... A class with an interest rate that resets
periodically based upon a designated index
and that varies directly with changes in
the index.
Interest Only Class............... A class that is entitled to receive some
or all of the interest payments made on
the mortgage loans and little or no
principal. Interest Only Classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is referred
to as nominal since it is extremely small
compared to other classes. A notional
amount is the amount used as a reference
to calculate the amount of interest due on
an Interest Only Class that is not
entitled to any distributions in respect
to principal.
Inverse Floating Rate Class....... A class with an interest rate that resets
periodically based upon a designated index
and that varies inversely with changes in
the index and with changes in the interest
rate payable on the related Floating Rate
Class.
Principal Only Class.............. A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Step Coupon Class................. A class with a fixed interest rate that is
reduced to a lower fixed rate after a
specified period of time. The difference
between the initial interest rate and the
lower interest rate will be supported by a
reserve fund established on the closing
date.
Variable Rate Class............... A class with an interest rate that resets
periodically and is calculated by
reference to the rate or rates of interest
applicable to the mortgage loans.
Advances
The master servicer may be required to advance on or before each Distribution
Date, from its own funds or funds held in the Collection Account for future
47
distributions to the holders of certificates, an amount equal to an Advance,
subject to the master servicer's determination that the Advances will be
recoverable out of late payments by mortgagors, Liquidation Proceeds, Insurance
Proceeds or otherwise. In the case of Cooperative Loans, the master servicer
may also be required to advance any unpaid maintenance fees and other charges
under the related proprietary leases as specified in the related prospectus
supplement. If specified in the related prospectus supplement, the trustee or
another entity so specified may be required to make the Advances to the extent
the master servicer fails to do so. The prospectus supplement for a series of
certificates will specify the nature and timing of amounts to be advanced to
the holders of the certificates and the manner in which Advances may be
recovered. Funds so advanced are reimbursable to the master servicer to the
extent permitted by the related pooling and servicing agreement. The master
servicer's or other entity's obligation to make Advances will not guarantee or
insure against losses to holders of the certificates.
Reports to Certificateholders
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable prospectus supplement, the
master servicer or the trustee will furnish to each certificateholder of record
of the related series a statement setting forth, to the extent applicable to
the series of certificates, among other things:
(1) the amount of the distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related prospectus
supplement, prepayment penalties included therein;
(2) the amount of the distribution allocable to interest;
(3) the amount of any Advance;
(4) the outstanding Certificate Balance or notional amount of each
class of the related series after giving effect to the
distribution of principal on the Distribution Date;
(5) the related amount of the servicing compensation retained or
withdrawn from the Collection Account by the master servicer;
(6) the number and aggregate principal balances of mortgage loans
delinquent and in foreclosure as of the close of business on the
last day of the calendar month preceding the Distribution Date;
(7) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(8) if applicable, the amount remaining in any Reserve Fund at the
close of business on the Distribution Date;
(9) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(10) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
48
Where applicable, any amount set forth above may be expressed as a dollar
amount per single certificate of the relevant class having the Percentage
Interest specified in the related prospectus supplement. The report to
certificateholders for any series of certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
certificateholder of record at any time during a calendar year a report.
. as to the aggregate of amounts reported under clause (1) and (2) for the
calendar year or, if the person was a certificateholder of record during
a portion of a calendar year, for the applicable portion of that year
and
. other customary information as may be deemed necessary or desirable for
certificateholders to prepare their tax returns.
Book-Entry Registration
If so specified in the related prospectus supplement, a class of certificates
may be book-entry certificates. Persons acquiring beneficial ownership
interests in these certificates will hold their certificates through DTC in the
United States, or CEDEL or Euroclear in Europe if they are participants of
these systems, or indirectly through organizations which are participants in
these systems. The book-entry certificates will be issued in one or more
certificates which equal the aggregate principal balance of the class of
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries, which in turn
will hold the positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as depositary for CEDEL, and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear.
Except as described below, no person acquiring a book-entry certificate will be
entitled to receive a physical certificate representing the certificate. Unless
and until definitive certificates are issued, it is anticipated that the only
"certificateholder" of the certificates will be Cede & Co., as nominee of DTC.
Certificate owners will not be certificateholders as that term is used in the
pooling and servicing agreement. Certificate owners are only permitted to
exercise their rights indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry certificate will be recorded
on the records of a Financial Intermediary. In turn, the Financial
Intermediary's ownership of the book-entry certificate will be recorded on the
records of DTC, or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate.
Certificate owners of a class of book-entry certificates will receive all
distributions of principal of, and interest on, the certificates from the
trustee through DTC and DTC
49
participants. Except under the circumstances described below, while the
certificates are outstanding, DTC is required, under their Rules, to make book-
entry transfers among participants on whose behalf it acts with respect to the
class of certificates and is required to receive and transmit distributions of
principal of, and interest on, the certificates. Participants and indirect
participants with whom certificate owners have accounts with respect to the
certificates are similarly required to make book-entry transfers and receive
and transmit the distributions on behalf of their respective certificate
owners. Accordingly, although certificate owners will not possess certificates,
the Rules provide a mechanism by which certificate owners will receive
distributions and will be able to transfer their interest.
Certificate owners will not receive or be entitled to receive certificates
representing their respective interests in the certificates, except under the
limited circumstances described below. Unless and until definitive certificates
are issued, certificate owners who are not participants may transfer ownership
of the certificates only through participants and indirect participants by
instructing the participants and indirect participants to transfer the
certificates, by book-entry transfer, through DTC for the account of the
purchasers of the certificates, which account is maintained with their
respective participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of a class of book-entry certificates will
be executed through DTC, and the accounts of the respective participants at DTC
will be debited and credited. Similarly, the participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing certificate owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a participant will be made during
subsequent securities settlement processing and dated the business day
following the DTC settlement date. The credits or any transactions in the
securities settled during the processing will be reported to the relevant
Euroclear or CEDEL participants on the business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL participant
or Euroclear participant to a DTC participant will be received with value on
the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
certificates, see "Federal Income Tax Consequences--REMICs--Taxation of Certain
Foreign Investors" herein and "Global Clearance, Settlement and Tax
Documentation Procedures" and "Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with DTC rules.
Transfers between CEDEL participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL participants or
Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf
50
of the relevant European international clearing system by the relevant
depositary; however, the cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in the system in accordance with its rules and procedures and
within its established deadlines (European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the relevant
depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL participants and Euroclear participants may not deliver instructions
directly to the european depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants and/or their representatives, some of which own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
CEDEL participants through electronic book-entry changes in accounts of CEDEL
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
Indirect access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants and to
clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium, office of the
51
Euroclear Operator, under contract with the Belgium Cooperative. All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Belgium Cooperative. The Belgium Cooperative establishes policy for
Euroclear on behalf of Euroclear participants. Euroclear participants include
banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions. The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.
Distributions on the book-entry certificates will be made on each
Distribution Date by the trustee to DTC. DTC will be responsible for crediting
the amount of the payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing the payments to the beneficial owners of the book-
entry certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry certificates that
it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since the payments will
be forwarded by the trustee to Cede & Co. Distributions with respect to
certificates held through CEDEL or Euroclear will be credited to cash accounts
of CEDEL participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by the relevant
depositary. The distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences-- REMICs--Taxation of Certain Foreign Investors," "--Backup
Withholding" and "--Reporting Requirements." Because DTC can only act on behalf
of Financial Intermediaries, the ability of a beneficial owner to pledge book-
entry certificates to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of the book-entry
certificates, may be limited due to the lack of physical certificates for the
book-entry certificates. In addition, issuance of the book-entry certificates
in book-entry form may reduce the liquidity of the certificates in the
secondary
52
market since certain potential investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the trust fund will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the book-entry certificates of the beneficial owners are credited.
With respect to each class of book-entry certificates, DTC will advise the
trustee that, unless and until definitive certificates are issued, DTC will
take any action permitted to be taken by the holders of the book-entry
certificates under the related pooling and servicing agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
book-entry certificates are credited, to the extent that these actions are
taken on behalf of Financial Intermediaries whose holdings include the book-
entry certificates. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a certificateholder under the
pooling and servicing agreement on behalf of a CEDEL participant or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to the ability of the relevant depositary to effect the actions on its
behalf through DTC. DTC may take actions, at the direction of the related
participants, with respect to some certificates of a class of book-entry
certificates which conflict with actions taken with respect to other
certificates of the class.
Definitive certificates will be issued to beneficial owners of book-entry
certificates, or their nominees, rather than to DTC, only if
. DTC or the depositor advises the related trustee in writing that DTC is
no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the book-
entry certificates and the depositor or trustee is unable to locate a
qualified successor,
. the depositor, at its sole option, with the consent of trustee, elects
to terminate a book-entry system through DTC, or
. in accordance with other provisions described in the related prospectus
supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee for a series will be required to notify all
beneficial owners of the occurrence of these event and the availability through
DTC of definitive certificates. Upon surrender by DTC of the global certificate
or certificates representing the book-entry certificates and instructions for
re-registration, the trustee will issue definitive certificates, and thereafter
the trustee will recognize the holders of the definitive certificates as
certificateholders of the series under the related pooling and servicing
agreement.
Although DTC, CEDEL and Euroclear have agreed to these procedures in order to
facilitate transfers of certificates among participants of DTC, CEDEL and
Euroclear, they
53
are under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time.
Neither the depositor, the master servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of any class of book-entry
certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
series of certificates or with respect to the mortgage loans in the related
trust fund. Credit enhancement may be in the form of any one or more of the
following:
. limited financial guaranty policy issued by an entity named in the
related prospectus supplement,
. the subordination of one or more classes of certificates of a series,
. the establishment of one or more reserve funds,
. the use of a cross-support feature,
. use of a Mortgage Pool Insurance Policy,
. Bankruptcy Bond,
. Special Hazard Insurance Policy,
. Surety Bond,
. Letters of Credit described in this prospectus and in the related
prospectus supplement, or
. overcollateralization of one or more classes of the certificates of a
series.
If so provided in the related prospectus supplement, any form of credit
enhancement may be structured so as to be drawn upon by more than one series to
the extent described therein. The coverage provided by any credit enhancement
will be described in the related prospectus supplement. Generally, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
certificateholders will bear their allocable share of deficiencies. Moreover,
if a form of credit enhancement covers more than one Covered Trust,
Certificateholders evidencing interests in any of the Covered Trusts will be
subject to the risk that the credit enhancement will be exhausted by the claims
of other Covered Trusts prior to the Covered Trust receiving any of its
intended share of the coverage.
54
If credit enhancement is provided with respect to one or more classes of
certificates of a series, or the related mortgage loans, the related prospectus
supplement will include a description of:
. the nature and amount of coverage under the credit enhancement,
. any conditions to payment thereunder not otherwise described herein,
. the conditions, if any, under which the amount of coverage under the
credit enhancement may be reduced and under which the credit
enhancement may be terminated or replaced and
. the material provisions relating to the credit enhancement.
Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of credit
enhancement, including:
. a brief description of its principal business activities,
. its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
. if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
. its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
See "Risk Factors--Limitations, Reduction and Substitution of Credit
Enhancement."
Subordination
If so specified in the related prospectus supplement, protection afforded to
holders of one or more classes of certificates of a series by means of the
subordination feature will be accomplished by the preferential right of holders
of one or more other classes of the series to distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination that
otherwise would have been payable to holders of subordinated certificates under
the circumstances and to the extent specified in the related prospectus
supplement. If specified in the related prospectus supplement, delays in
receipt of scheduled payments on the mortgage loans and losses on defaulted
mortgage loans will be borne first by the various classes of subordinated
certificates and thereafter by the various classes of senior certificates, in
each case under the circumstances and subject to the limitations specified in
the related prospectus supplement. The aggregate distributions in respect of
delinquent payments on the mortgage loans over the lives of the certificates or
at any time, the aggregate losses in respect of defaulted mortgage loans which
must be borne by the subordinated certificates by virtue of subordination and
the amount of the distributions otherwise distributable to the subordinated
certificateholders that will be distributable to senior certificateholders on
any Distribution Date may be limited as specified in the related prospectus
supplement. If aggregate distributions in respect of delinquent payments on the
mortgage loans or aggregate
55
losses in respect of the mortgage loans were to exceed an amount specified in
the related prospectus supplement, holders of senior certificates would
experience losses on the certificates.
In addition to or in lieu of the statements above, if so specified in the
related prospectus supplement, all or any portion of distributions otherwise
payable to holders of subordinated certificates on any Distribution Date may
instead be deposited into one or more Reserve Funds established with the
trustee. If so specified in the related prospectus supplement, the deposits may
be made on each Distribution Date, for specified periods or until the balance
in the Reserve Funds has reached a specified amount and, following payments
from the Reserve Fund to holders of senior certificates or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve Fund
to required levels, in each case as specified in the related prospectus
supplement. If so specified in the related prospectus supplement, amounts on
deposit in the Reserve Fund may be released to the holders of the class of
certificates specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of senior
certificates and subordinated certificates may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of senior certificates and as between classes of
subordinated certificates, distributions may be allocated among the classes
.in the order of their scheduled final distribution dates,
.in accordance with a schedule or formula,
.in relation to the occurrence of events, or
.otherwise, in each case as specified in the related prospectus
supplement.
As between classes of subordinated certificates, payments to holders of
senior certificates on account of delinquencies or losses and payments to any
Reserve Fund will be allocated as specified in the related prospectus
supplement.
Mortgage Pool Insurance Policies
If specified in the related prospectus supplement relating to a mortgage
pool, a separate mortgage pool insurance policy will be obtained for the
mortgage pool and issued by the insurer named in the prospectus supplement.
Each mortgage pool insurance policy will, subject to the limitations described
in the related prospectus supplement, cover loss by reason of default in
payment on mortgage loans in the mortgage pool in an amount specified in the
prospectus supplement which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. The amount and
principal terms of any coverage will be set forth in the related prospectus
supplement.
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Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special hazard
insurance policy will be obtained for the mortgage pool and will be issued by
the insurer named in the prospectus supplement. Each special hazard insurance
policy will, subject to limitations described in the related prospectus
supplement, protect holders of the related certificates from:
. loss by reason of damage to Mortgaged Properties caused by certain
hazards; including earthquakes and, to a limited extent, tidal waves and
related water damage or as otherwise specified in the related prospectus
supplement; not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged
Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and
. loss caused by reason of the application of the coinsurance clause
contained in hazard insurance policies.
See "The Pooling and Servicing Agreement--Hazard Insurance." Each special
hazard insurance policy will not cover losses occasioned by fraud or conversion
by the trustee or the master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood, if the
Mortgaged Property is located in a federally designated flood area, nuclear or
chemical contamination and certain other risks. The amount and principal terms
of coverage under any special hazard insurance policy will be specified in the
related prospectus supplement. Each special hazard insurance policy will
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the property securing the mortgage loan have been kept in force
and other protection and preservation expenses have been paid.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer
named in the prospectus supplement. Each bankruptcy bond will cover, to the
extent specified in the related prospectus supplement, certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a mortgage loan or a reduction by the court of the principal amount
of a mortgage loan and will cover certain unpaid interest on the amount of the
principal reduction from the date of the filing of a bankruptcy petition. The
required amount of coverage under each bankruptcy bond will be set forth in the
related prospectus supplement. Coverage under a bankruptcy bond may be canceled
or reduced if the cancellation or reduction would not adversely affect the then
current rating or ratings of the related certificates. See "Certain Legal
Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code
and Other Limitations on Lenders." The amount and principal terms of any
coverage will be set forth in the prospectus supplement.
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Reserve Funds
If so specified in the related prospectus supplement, credit support with
respect to a series of certificates may be provided by the establishment and
maintenance with the trustee for the series of certificates, in trust, of a
Reserve Fund. The related prospectus supplement will specify whether or not the
Reserve Fund will be included in the trust fund for the series.
The Reserve Fund for a series will be funded:
. by the deposit of cash, U.S. Treasury securities, instruments evidencing
ownership of principal or interest payments, letters of credit, demand
notes, certificates of deposit or a combination of these in the
aggregate amount specified in the related prospectus supplement,
. by the deposit from time to time of certain amounts, as specified in the
related prospectus supplement to which the subordinated
certificateholders, if any, would otherwise be entitled or
. in any other manner as may be specified in the related prospectus
supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments. If a letter of credit is deposited with the trustee, it will be
irrevocable. Unless otherwise specified in the related prospectus supplement,
any instrument deposited therein will name the trustee, in its capacity as
trustee for the holders of the certificates, as beneficiary and will be issued
by an entity acceptable to each rating agency that rates the certificates.
Additional information with respect to the instruments deposited in the Reserve
Funds will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of certificates for the purposes, in the manner and at the times
specified in the related prospectus supplement.
Cross Support
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of certificates. In this case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to certificates evidencing a beneficial
ownership interest in other asset groups within the same trust fund. The
related prospectus supplement for a series which includes a cross support
feature will describe the manner and conditions for applying the cross support
feature.
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If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of the coverage to the identified trust funds.
Limited Guarantee
If specified in the prospectus supplement with respect to a series of
certificates, credit enhancement may be provided by a Limited Guarantee. If
specified in the related prospectus supplement, a Limited Guarantee may be
provided by an affiliate or affiliates of the depositor.
Letter of Credit
Alternative credit support with respect to a series of certificates may be
provided by the issuance of a Letter of Credit. The coverage, amount and
frequency of any reduction in coverage provided by a Letter of Credit issued
with respect to a series of certificates will be set forth in the related
prospectus supplement.
Surety Bonds
If specified in the prospectus supplement relating to a series of
certificates, credit support with respect to one or more classes of
certificates of a series may be provided by the issuance of a Surety Bond. The
coverage, amount and frequency of any reduction in coverage provided by a
Surety Bond will be set forth in the related prospectus supplement.
Overcollateralization
If specified in the related prospectus supplement, credit support may consist
of overcollateralization whereby the aggregate principal amount of the mortgage
loans, including any Subsequent Mortgage Loans, exceeds the aggregate
Certificate Balance of the certificates. The overcollateralization may exist at
the time the certificates are issued or develop thereafter as a result of the
application of certain interest collections, in excess of amounts necessary to
pay the Pass-Through Rate on the certificates, received in connection with the
mortgage loans, including any Subsequent Mortgage Loans. The existence of any
overcollateralization and the manner, if any, by which it increases or
decreases, will be set forth in the related prospectus supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates will be
affected primarily by the amount and timing of principal payments received on
or in respect of the mortgage loans included in the related trust fund. The
original terms to maturity of the
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mortgage loans in a given mortgage pool will vary depending upon the type of
mortgage loans included therein. Each prospectus supplement will contain
information with respect to the type and maturities of the mortgage loans in
the related mortgage pool. Mortgage loans may be prepaid without penalty in
full or in part at any time except as specified in the prospectus supplement.
The prepayment experience on the mortgage loans in a mortgage pool will affect
the life of the related series of certificates.
A number of factors, including, but not limited to, homeowner mobility,
economic conditions, the presence and enforceability of due-on-sale clauses,
mortgage market interest rates and the availability of mortgage funds, may
affect prepayment experience of mortgage loans.
Unless otherwise provided in the related prospectus supplement, all
conventional mortgage loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the mortgagor of the underlying Mortgaged Property. Mortgage loans insured
by the FHA, and mortgage loans partially guaranteed by the VA, are assumable
with the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on these mortgage loans may be lower than that of conventional
mortgage loans bearing comparable interest rates. The master servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or proposed further encumbrance of the Mortgaged Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
the master servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See "The
Pooling and Servicing Agreements--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
pooling and servicing agreement and certain legal developments that may affect
the prepayment experience on the mortgage loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by
the mortgage loans, the mortgage loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below the Mortgage Rates.
However, there can be no assurance that this will be the case.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest on the principal amount of the mortgage loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. If so specified in the related prospectus
supplement, the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to holders of certificates
because interest on the principal amount of any mortgage loan so prepaid will
be paid only
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to the date of prepayment. Partial prepayments in a given month may be applied
to the outstanding principal balances of the mortgage loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
in that month. Both full and partial prepayments will not be passed through
until the month following receipt or at some other time as is specified in the
related prospectus supplement.
The effective yield to certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each mortgage loan from the first day of
the month, or some other date provided in the related prospectus supplement,
the distribution of the interest will not be made earlier than the Distribution
Date in the month following the month of accrual.
Under certain circumstances, the master servicer, the depositor or any other
party specified in the related prospectus supplement may have the option to
purchase the assets of a trust fund thereby effecting earlier retirement of the
related series of certificates. See "The Pooling and Servicing Agreement--
Termination; Optional Termination."
If so specified in the related prospectus supplement, upon notification from
a mortgagor of that mortgagor's intent to convert from an adjustable interest
rate to a fixed interest rate, and prior to the conversion of the mortgage
loan, the master servicer or other entity specified in the related prospectus
supplement will be obligated to purchase the related mortgage loan. Any
purchase of a mortgage loan would have the effect of a prepayment in full of
the mortgage loan.
From time to time, the master servicer or its affiliates may solicit the
refinancing of loans, including the mortgage loans, by offering a new loan to
the borrower. Any refinancing of a mortgage loan would have the effect of a
prepayment in full of the mortgage loan.
Factors other than those identified herein and in the related prospectus
supplement could significantly affect principal prepayments at any time and
over the lives of the certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the mortgage loans at any
time or over the lives of the certificates.
The prospectus supplement relating to a series of certificates will discuss
in greater detail the effect of the rate and timing of principal payments
including prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each pooling and
servicing agreement which are not described elsewhere in this prospectus. Where
particular provisions or terms used in the pooling and servicing agreements are
referred to, these provisions or terms are as specified in the pooling and
servicing agreements.
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Assignment of Mortgage Loans
At the time of issuance of the certificates of a series, the depositor will
cause the mortgage loans comprising the related trust fund to be assigned to
the trustee, together with all principal and interest received by or on behalf
of the depositor on or with respect to the mortgage loans after the cut-off
date, other than principal and interest due on or before the cut-off date and
other than any Retained Interest specified in the related prospectus
supplement. The trustee will, concurrently with the assignment, deliver the
certificates to the depositor in exchange for the mortgage loans. Each mortgage
loan will be identified in a schedule appearing as an exhibit to the related
pooling and servicing agreement. The schedule will include information as to
the outstanding principal balance of each mortgage loan after application of
payments due on the cut-off date, as well as information regarding the Mortgage
Rate, the current scheduled monthly payment of principal and interest, the
maturity of the loan, the loan-to-value ratio, or the combined loan-to-value
ratio, at origination and certain other information. If specified in the
related prospectus supplement, the depositor will deliver or cause to be
delivered to the trustee loans at a predetermined price for inclusion in the
trust fund within three months after the issuance of the certificates. The
related prospectus supplement for the trust fund will specify whether, and the
terms, conditions and manner under which, Subsequent Mortgage Loans will be
sold to the trust fund within the three month period.
In addition, the depositor will deliver or cause to be delivered to the
trustee as to each mortgage loan, among other things:
. the mortgage note endorsed without recourse in blank or to the order of
the trustee,
. the mortgage, deed of trust or similar instrument with evidence of
recording indicated, except for any mortgage not returned from the
public recording office, in which case the depositor will, unless
otherwise specified in the related prospectus supplement, deliver or
cause to be delivered a copy of the mortgage together with a certificate
that the original of that mortgage was delivered to the recording
office,
. an assignment of the mortgage to the trustee, which assignment will be
in recordable form, and
. any other security documents as may be specified in the related
prospectus supplement or the related pooling and servicing agreement.
Notwithstanding the statements above, a trust fund may include mortgage loans
where the original mortgage note is not delivered to the trustee if the
depositor delivers to the trustee or the custodian a copy or a duplicate
original of the mortgage note, together with an affidavit certifying that the
original has been lost or destroyed. With respect to these mortgage loans, the
trustee may not be able to enforce the mortgage note against the related
borrower. The depositor will be required to agree to repurchase, or substitute
for, each mortgage loan that is subsequently in default if the enforcement or
of the related mortgage is materially adversely affected by the absence of the
original mortgage note. The related pooling and servicing agreement will
generally require the depositor or another party specified in the
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related prospectus supplement to promptly cause the assignments of the related
loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
trustee, the recording is not required to protect the trustee's interest in the
loans against the claim of any subsequent transferee or any successor to or
creditor of the depositor or the originator of the loans.
Notwithstanding the preceding paragraph, with respect to any mortgage which
has been recorded in the name of MERS or its designee, no mortgage assignment
in favor of the trustee will be required to be prepared or delivered. Instead,
the master servicer will be required to take all actions as are necessary to
cause the applicable trust fund to be shown as the owner of the related
mortgage loan on the records of MERS for purposes of the system of recording
transfers of beneficial ownership of mortgages maintained by MERS.
With respect to any mortgage loans which are Cooperative Loans, the depositor
will cause to be delivered to the trustee:
. the related original cooperative note endorsed without recourse in blank
or to the order of the trustee,
. the original security agreement,
. the proprietary lease or occupancy agreement,
. the recognition agreement,
. an executed financing agreement,
. the relevant stock certificate,
. related blank stock powers and
. any other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an assignment
and a financing statement evidencing the trustee's security interest in each
Cooperative Loan.
The trustee will review the mortgage loan documents within a specified period
of days after receipt of the mortgage loan documents, and the trustee will hold
the documents in trust for the benefit of the certificateholders. Unless
otherwise specified in the related prospectus supplement, if any document is
found to be missing or defective in any material respect, the trustee will
notify the master servicer and the depositor. If the depositor cannot cure the
omission or defect within a specified period of days after receipt of notice,
the depositor will be obligated to purchase the related mortgage loan from the
trustee at the Purchase Price or, if so specified in the related prospectus
supplement, replace the mortgage loan with another mortgage loan that meets
certain requirements set forth therein. There can be no assurance that the
depositor will fulfill this purchase obligation. Although the master servicer
may be obligated to enforce the obligation to the extent described above under
"Mortgage Loan Program--Representations and Warranties; Repurchases," the
master servicer will not be obligated to purchase the mortgage loan if the
depositor defaults on its purchase obligation.
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Unless otherwise specified in the related prospectus supplement, this purchase
obligation constitutes the sole remedy available to the certificateholders or
the trustee for omission of, or a material defect in, a constituent document.
The mortgage loan purchase agreement will provide the depositor with remedies
against JVMC for the failure to deliver documentation with respect to the
mortgage loans required under the pooling and servicing agreement.
A custodian may maintain possession of, and, if applicable, review the
documents relating to, the mortgage loans as agent of the trustee pursuant
either to the terms of the pooling and servicing agreement or a separate
custodial agreement.
Notwithstanding the above provisions, with respect to a trust fund for which
a REMIC election is to be made, unless the related prospectus supplement
otherwise provides, no purchase of a mortgage loan will be made if the purchase
would result in a prohibited transaction tax under the Code.
Payments on Mortgage Loans; Deposits to Collection Account
The master servicer will establish and maintain or cause to be established
and maintained with respect to the related trust fund the Collection Account,
which unless otherwise specified in the related prospectus supplement, must be
either:
. maintained with a depository institution the short-term debt obligations
of which; or in the case of a depository institution that is the
principal subsidiary of a holding company, the short-term debt
obligations of which; are rated in the highest short-term rating
category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related series of certificates,
. an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund or the Savings Association Insurance Fund,
. an account or accounts the deposits in which are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund, to the limits
established by the Federal Deposit Insurance Corporation, and the
uninsured deposits in which are otherwise secured so that, as evidenced
by an opinion of counsel, the certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first
priority security interest against any collateral securing the funds
that is superior to the claims of any other depositors or general
creditors of the depository institution with which the Collection
Account is maintained,
. a trust account or accounts maintained with the trust department of a
federal or a state chartered depository institution or trust company,
acting in a fiduciary capacity or
. an account or accounts otherwise acceptable to the rating agencies.
The Collection Account may be maintained at First Union National Bank, an
affiliate of the depositor, so long as it maintains a long-term unsecured
rating of at least A by S&P and
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A2 by Moody's and a short-term rating of at least A-1 by S&P and P-1 by
Moody's. Investments in which amounts in the Collection Account may be invested
are limited to Eligible Investments. A Collection Account may be maintained as
an interest bearing account or the funds held therein may be invested pending
each succeeding Distribution Date in Eligible Investments. The master servicer
or its designee or any other entity set forth in the related prospectus
supplement will be entitled to receive any interest or other income earned on
funds in the Collection Account as additional compensation and will be
obligated to deposit in the Collection Account the amount of any loss
immediately as realized. The Collection Account may be maintained with the
master servicer or with a depository institution that is an affiliate of the
master servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the Collection
Account for each trust fund on a daily basis or any other period provided in
the related pooling and servicing agreement, to the extent applicable, the
following payments and collections received or advances made by or on behalf of
it subsequent to the cut-off date; other than payments due on or before the
cut-off date and exclusive of any amounts representing Retained Interest; or
other amounts at times specified in the related prospectus supplement and
provided in the pooling and servicing agreement:
. all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, prepayment
penalties, on the mortgage loans;
. all payments on account of interest on the mortgage loans, net of
applicable servicing compensation;
. (a) Insurance Proceeds and (b) Net Liquidation Proceeds and unreimbursed
advances made, if any, by the master servicer, and (c) any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the certificateholders by foreclosure or deed in lieu of
foreclosure;
. all proceeds of any mortgage loan or property in respect of any mortgage
loan purchased by the depositor as described under "Mortgage Loan
Program--Representations and Warranties; Repurchases" or "--Assignment
of Mortgage Loans" above and all proceeds of any mortgage loan
repurchased as described under "--Termination; Optional Termination"
below;
. all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance" below;
. any amount required to be deposited by the master servicer in connection
with losses realized on investments for the benefit of the master
servicer of funds held in the Collection Account and, to the extent
specified in the related prospectus supplement, any payments required to
be made by the master servicer in connection with prepayment interest
shortfalls; and
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. all other amounts required to be deposited in the Collection Account
under the pooling and servicing agreement.
The master servicer may from time to time direct the institution which
maintains the Collection Account, to withdraw funds from the Collection Account
for the following purposes or any other purposes set forth in the related
prospectus supplement:
. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the Master Servicing Fee and, as
additional servicing compensation, earnings on or investment income with
respect to funds in the amounts in the Collection Account credited
thereto;
. to reimburse the master servicer for Advances;
. to reimburse the master servicer for any Advances previously made which
the master servicer has determined to be nonrecoverable;
. to reimburse the master servicer from Insurance Proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
. to reimburse the master servicer for unpaid Master Servicing Fees and
unreimbursed out-of-pocket costs and expenses incurred by the master
servicer in the performance of its servicing obligations, the right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which the advances were made;
. to pay to the master servicer, with respect to each mortgage loan or
property acquired in respect of each mortgage loan that has been
purchased by the master servicer under the pooling and servicing
agreement, all amounts received thereon and not taken into account in
determining the related principal balance of the repurchased mortgage
loan;
. to reimburse the master servicer or the depositor for expenses incurred
and reimbursable under the pooling and servicing agreement;
. to withdraw any amount deposited in the Collection Account and not
required to be deposited therein; and
. to clear and terminate the Collection Account upon termination of the
pooling and servicing agreement.
In addition, on or prior to the business day immediately preceding each
Distribution Date or any other date specified in the related prospectus
supplement, the master servicer shall withdraw from the Collection Account the
amount of Available Distribution Amount, to the extent on deposit, for deposit
in an account maintained by the trustee for the related series of certificates.
Notwithstanding the above statements, for as long as HFC remains the master
servicer under the pooling and servicing agreement and maintains a rating of P-
1 from Moody's and A-1 from S&P, which is currently the case, the master
servicer need not deposit collections into
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the Collection Account on the day indicated above but may use for its own
benefit all collections until the related Distribution Date at which time the
master servicer will make the deposits in an amount equal to the net amount of
the deposits and withdrawals which would have been made had the conditions of
this sentence not applied.
Pre-Funding Account
If so specified in the prospectus supplement, the related pooling and
servicing agreement may provide for the transfer by the depositor of Subsequent
Mortgage Loans. These Subsequent Mortgage Loans will be required to conform to
the requirements set forth in the related pooling and servicing agreement
providing for the transfer. As specified in the related prospectus supplement,
the transfer may be funded by a Pre-Funding Account. If a Pre-Funding Account
is established, all or a portion of the proceeds of the sale of one or more
classes of certificates of the related series will be deposited in the account
to be released as additional mortgage loans are transferred to the trust fund.
The related pooling and servicing agreement will establish a period of time
known as the Funding Period. Unless otherwise specified in the related
prospectus supplement, amounts set aside to fund these transfers, whether in a
Pre-Funding Account or otherwise, and not so applied within the Funding Period
will be deemed to be principal prepayments and applied in the manner set forth
in the prospectus supplement.
Collection Procedures
The master servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with each pooling and
servicing agreement and any mortgage pool insurance policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guarantee and bankruptcy bond or
alternative arrangements, follow the collection procedures as are customary for
its portfolio with respect to mortgage loans that are comparable to the
mortgage loans. Consistent with the above, the master servicer may, in its
discretion:
. waive any assumption fee, late payment or other charge in connection
with a mortgage loan and
. to the extent not inconsistent with the coverage of any mortgage loan by
a mortgage pool insurance policy, Primary Mortgage Insurance Policy, FHA
Insurance, VA Guaranty or bankruptcy bond or alternative arrangements,
if applicable, arrange with a mortgagor a schedule for the liquidation
of delinquencies in a manner that is determined by the master servicer
to be customary with respect to comparable mortgage loans of the master
servicer's portfolio.
To the extent the master servicer is obligated to make or to cause to be made
Advances, the obligation will remain during the period of this arrangement.
Unless otherwise specified in the related prospectus supplement, in any case
in which property securing a mortgage loan has been, or is about to be,
conveyed by the mortgagor or obligor, the master servicer will, to the extent
it has knowledge of the conveyance or
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proposed conveyance, have the option to exercise or cause to be exercised its
rights to accelerate the maturity of the mortgage loan under any due-on-sale
clause applicable thereto, but only if the exercise of these rights is
permitted by applicable law; provided, however, the master servicer will not
take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. If the master servicer elects not
to exercise any due-on-sale clause or if the master servicer reasonably
believes it is unable under applicable law to enforce the due-on-sale clause,
or if the mortgage loan is insured by the FHA or partially guaranteed by the
VA, the master servicer will enter into or cause to be entered into an
assumption agreement or a substitution agreement with the person to whom the
property has been or is about to be conveyed, under which the person becomes
liable for repayment of the mortgage loan.
Any fee collected by or on behalf of the master servicer for entering into an
assumption agreement will be retained by or on behalf of the master servicer as
additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans--Due-on-Sale Clauses." In connection with any assumption, the terms of
the related mortgage loan may not be changed.
Hazard Insurance
The master servicer will require the mortgagor or obligor on each mortgage
loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Mortgaged Property in the state in which the
Mortgaged Property is located. The coverage will be in an amount not less than
the replacement value of the improvements securing the mortgage loan or the
principal balance owing on the mortgage loan, whichever is less. All amounts
collected by the master servicer under any hazard policy, except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released
to the mortgagor or obligor in accordance with the master servicer's normal
servicing procedures, will be deposited in the related Collection Account. In
the event that, at its option, the master servicer maintains a blanket policy
insuring against hazard losses on all the mortgage loans comprising part of a
trust fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. The blanket policy may contain
a deductible clause, in which case the master servicer will be required to
deposit from its own funds into the related Collection Account the amounts
which would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a mortgage loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the mortgage loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms are dictated by respective state laws, and most
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policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement, nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The above list is merely indicative of certain kinds of uninsured risks and is
not intended to be all inclusive. If the Mortgaged Property securing a mortgage
loan is located in a federally designated special flood area, the master
servicer will require the mortgagor or obligor to obtain and maintain flood
insurance, to the extent that insurance is available.
The hazard insurance policies covering properties securing the mortgage loans
typically contain a clause which in effect requires the insured at all times to
carry insurance of a specified percentage, generally 80% to 90%, of the full
replacement value of the insured property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of:
. the actual cash value, generally defined as replacement cost at the time
and place of loss, less physical depreciation, of the improvements
damaged or destroyed or
. the proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance the master servicer may cause to be
maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related prospectus supplement, a Special Hazard Insurance Policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement--Special Hazard Insurance Policies."
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain the insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
Cooperative's building could significantly reduce the value of the collateral
securing the Cooperative Loan to the extent not covered by other credit
support.
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Realization Upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies
Generally, the master servicer will not maintain or cause to be maintained a
Primary Mortgage Insurance Policy with regard to any mortgage loan. However, to
the extent specified in the related prospectus supplement, the master servicer
will be required to maintain or cause to be maintained, as the case may be, in
full force and effect, Primary Mortgage Insurance Policies with regard to
specified mortgage loans in the related trust fund. Primary Mortgage Insurance
Policies are not required for home equity loans. The master servicer will not
cancel or refuse to renew any Primary Mortgage Insurance Policy in effect at
the time of the initial issuance of a series of certificates that is required
to be kept in force under the applicable pooling and servicing agreement unless
the replacement Primary Mortgage Insurance Policy for the canceled or
nonrenewed policy is maintained with an insurer whose claims-paying ability is
sufficient to maintain the current rating of the classes of certificates of the
series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a mortgage loan will consist of the insured percentage of the unpaid
principal amount of the covered mortgage loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less:
. all rents or other payments collected or received by the insured, other
than the proceeds of hazard insurance, that are derived from or in any
way related to the Mortgaged Property,
. hazard insurance proceeds in excess of the amount required to restore
the Mortgaged Property and which have not been applied to the payment of
the mortgage loan,
. amounts expended but not approved by the Primary Insurer,
. claim payments previously made by the Primary Insurer and
. unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including:
. fraud or negligence in origination or servicing of the mortgage loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the mortgage loan;
. failure to construct the Mortgaged Property subject to the mortgage loan
in accordance with specified plans;
. physical damage to the Mortgaged Property; and
. the related master servicer not being approved as a servicer by the
Primary Insurer.
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Recoveries Under a Primary Mortgage Insurance Policy. As conditions precedent
to the filing of or payment of a claim under a Primary Mortgage Insurance
Policy covering a mortgage loan, the insured will be required to:
. advance or discharge (a) all hazard insurance policy premiums and (b) as
necessary and approved in advance by the Primary Insurer:
(1) real estate property taxes,
(2) all expenses required to maintain the related Mortgaged Property
in at least as good a condition as existed at the effective date of
the Primary Mortgage Insurance Policy, ordinary wear and tear
excepted,
(3) Mortgaged Property sales expenses,
(4) any outstanding liens, as defined in the Primary Mortgage
Insurance Policy, on the Mortgaged Property and
(5) foreclosure costs, including court costs and reasonable attorneys'
fees;
. in the event of any physical loss or damage to the Mortgaged Property,
have the Mortgaged Property restored and repaired to at least as good a
condition as existed at the effective date of the Primary Mortgage
Insurance Policy, ordinary wear and tear excepted; and
. tender to the Primary Insurer good and merchantable title to and
possession of the Mortgaged Property.
The master servicer, on behalf of itself, the trustee and the
certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take reasonable steps as are necessary to
receive payment or to permit recovery thereunder with respect to defaulted
mortgage loans. As set forth above, all collections by or on behalf of the
master servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to
be deposited in the Collection Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the
master servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines:
. the restoration will increase the proceeds to certificateholders on
liquidation of the mortgage loan after reimbursement of the master
servicer for its expenses and
. the expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted mortgage loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted mortgage loan is not covered by a Primary
Mortgage Insurance Policy, the master servicer
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will be obligated to follow or cause to be followed the normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
mortgage loan. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted mortgage loan are less than the principal balance of the
mortgage loan plus interest accrued thereon that is payable to
certificateholders, the trust fund will realize a loss in the amount of the
difference plus the aggregate of any unpaid servicing compensation and expenses
incurred by the master servicer in connection with the proceedings and which
are reimbursable under the pooling and servicing agreement. In the unlikely
event that any proceedings result in a total recovery which is, after
reimbursement to the master servicer of its expenses and any unpaid servicing
compensation, in excess of the principal balance of the mortgage loan plus
interest accrued thereon that is payable to certificateholders, the master
servicer will be entitled to withdraw or retain from the Collection Account,
unless otherwise specified in the related prospectus supplement, amounts
representing the balance of the excess, exclusive of any amount required by law
to be forwarded to the related mortgagor, as additional servicing compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
the mortgage loan plus interest accrued thereon that is payable to
certificateholders, the master servicer will be entitled to withdraw or retain
from the Collection Account amounts representing its normal servicing
compensation with respect to the mortgage loan. In the event that the master
servicer has expended its own funds to restore the damaged Mortgaged Property
and the funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Collection Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to the
expenses incurred by it, in which event the trust fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the master servicer, no payment or recovery
will result in a recovery to the trust fund which exceeds the principal balance
of the defaulted mortgage loan together with accrued interest thereon. See
"Credit Enhancement."
Junior Mortgages
The mortgage loans underlying the certificates of a series will be secured by
mortgages or deeds of trust which may be second or more junior mortgages to
other mortgages held by other lenders or institutional investors. The rights of
the trust fund and therefore the holders of the related certificates, as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee
under the senior mortgage, including the prior rights of the senior mortgagee
to receive hazard insurance and condemnation proceeds and to cause the property
securing the mortgage loan to be sold upon default of the mortgagor. If the
property is sold, the junior mortgagee's lien will be extinguished unless the
junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage.
A junior mortgagee may satisfy a defaulted senior loan in full and, in some
states,
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may cure the default and bring the senior loan current, in either event adding
the amounts expended to the balance due on the junior loan. In most states,
absent a provision in the mortgage or deed of trust, no notice of default is
required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured
by the mortgage, in the order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
FHA Insurance; VA Guarantees
Mortgage loans designated in the related prospectus supplement as insured by
the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1937, as amended. The mortgage loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Mortgage loans insured by the
FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured mortgage loans relating
to a series may have an interest rate or original principal amount exceeding
the applicable FHA limits at the time of origination of the loan.
The insurance premiums for mortgage loans insured by the FHA are collected by
lenders approved by HUD or by the master servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure, or other
acquisition of possession, and conveyance of the mortgaged premises to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured mortgage loan, the master servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined, either by
the master servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the master servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms
of forbearance plans with the mortgagor. The plans may involve the reduction or
suspension of regular mortgage payments for a specified period, with the
payments to be made up on or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or beyond the maturity date.
In addition, when a default caused by these circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the master
servicer
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in partial or full satisfaction of amounts due under the mortgage loan, which
payments are to be repaid by the mortgagor to HUD, or by accepting assignment
of the loan from the master servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the mortgage loan, and
HUD must have rejected any request for relief from the mortgagor before the
master servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer for certain costs and expenses and to deduct
certain amounts received or retained by the master servicer after default. When
entitlement to insurance benefits results from foreclosure, or other
acquisition of possession, and conveyance to HUD, the master servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to the date but in general
only to the extent it was allowed under a forbearance plan approved by HUD.
When entitlement to insurance benefits results from assignment of the mortgage
loan to HUD, the insurance payment includes full compensation for interest
accrued and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured mortgage loan, bears interest from a date 30 days
after the mortgagor's first uncorrected failure to perform any obligation to
make any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
Mortgage loans designated in the related prospectus supplement as guaranteed
by the VA will be partially guaranteed by a VA Guarantee. The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran, or in certain
instances the spouse of a veteran, to obtain a mortgage loan guarantee by the
VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As
of January 1, 1996, the maximum guarantee that may be issued by the VA under a
VA guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
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With respect to a defaulted VA guaranteed mortgage loan, the master servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured mortgage loan originally guaranteed applied to indebtedness outstanding
as of the applicable date of computation specified in the VA regulations.
Payments under the guarantee will be equal to the unpaid principal amount of
the loan, interest accrued on the unpaid balance of the loan to the appropriate
date of computation and limited expenses of the mortgagee, but in each case
only to the extent that the amounts have not been recovered through liquidation
of the Mortgaged Property. The amount payable under the guarantee may in no
event exceed the amount of the original guarantee.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer in
respect of its activities for each series of certificates will be equal to the
Master Servicing Fee. In addition, the master servicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from mortgagors, and any benefit which may accrue as a result of the
investment of funds in the applicable Collection Account, unless otherwise
specified in the related prospectus supplement.
The master servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related pooling and servicing agreement, including,
without limitation, payment of any fee or other amount payable in respect of
any credit enhancement arrangements, payment of the fees and disbursements of
the trustee, any custodian appointed by the trustee, the certificate registrar
and any paying agent, and payment of expenses incurred in enforcing the
obligations of the master servicer. The master servicer will be entitled to
reimbursement of certain of these expenses. In addition, as indicated in the
preceding section, the master servicer will be entitled to reimbursements for
certain expenses incurred by it in connection with Liquidated Mortgage Loans
and in connection with the restoration of Mortgaged Properties, the right of
reimbursement being prior to the rights of certificateholders to receive any
related Liquidation Proceeds, including Insurance Proceeds.
Evidence as to Compliance
Each pooling and servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the trustee to the effect that, on the basis of the
examination by the firm conducted substantially in compliance with the audit
program applicable to the master servicer, the servicing by or on behalf of the
master servicer of mortgage loans, private mortgage-backed securities or agency
securities, under pooling and servicing agreements substantially similar to
each other, including the related pooling and servicing agreement, was
conducted in compliance with the agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the audit
program requires it to report.
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Each pooling and servicing agreement will also provide for delivery to the
trustee, on or before a specified date in each year, of an annual statement
signed by an officer or officers of the master servicer to the effect that the
master servicer has fulfilled its obligations under the pooling and servicing
agreement in all material respects throughout the preceding year or specifying
any known failure to do so.
Copies of the annual accountants' statement and the statement of officers of
the master servicer may be obtained by certificateholders of the related series
without charge upon written request to the master servicer or the trustee at
the address set forth in the related prospectus supplement.
Certain Matters Regarding the Master Servicer and the Depositor
Each pooling and servicing agreement will provide that, subject to the master
servicer's right to assign its rights and delegate its duties as described
below, the master servicer may not resign from its obligations and duties under
the pooling and servicing agreement unless its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it, except in connection with a permitted transfer of servicing. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the pooling and
servicing agreement.
Each pooling and servicing agreement will further provide that neither the
master servicer, the depositor nor any director, officer, employee, or agent of
the master servicer or the depositor will be under any liability to the related
trust fund or certificateholders for any action taken or for refraining from
the taking of any action in good faith under the pooling and servicing
agreement, or for errors in judgment; provided, however, neither the master
servicer, the depositor nor any director, officer, employee, or agent of the
master servicer or the depositor will be protected against any liability which
would otherwise be imposed by reason of any breach of the terms and conditions
of the pooling and servicing agreement. Each pooling and servicing agreement
will further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the pooling and servicing agreement or the certificates,
other than any loss, liability or expense related to any specific mortgage loan
or mortgage loans, except any loss, liability or expense otherwise reimbursable
under the pooling and servicing agreement, and any loss, liability or expense
incurred by reason of any willful breach of the terms and conditions of the
pooling and servicing agreement. In addition, each pooling and servicing
agreement will provide that neither the master servicer nor the depositor will
be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its respective responsibilities under the pooling
and servicing agreement and which in its opinion may involve it in any expense
or liability. The master servicer or the depositor may, however, in its
discretion undertake any action which it may deem necessary or desirable with
respect to the pooling and servicing agreement and the rights and duties of the
parties thereto and the interests of
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the certificateholders thereunder. In this event, the legal expenses and costs
of the action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust fund and the master servicer or the depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to certificateholders. The right of reimbursement will survive
termination of the pooling and servicing agreement or resignation of the master
servicer or the depositor.
Any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each pooling and
servicing agreement.
The master servicer has the right to assign its rights and delegate its
duties and obligations under the pooling and servicing agreement for each
series, provided that each applicable rating agency's rating of any
certificates for that series in effect immediately prior to the assignment,
sale or transfer is not reasonably likely to be qualified, downgraded or
withdrawn as a result of the assignment, sale or transfer and the certificates
are not reasonably likely to be placed on credit review status by any rating
agency. The master servicer will be released from its obligations under the
pooling and servicing agreement upon any assignment and delegation, except that
the master servicer will remain liable for all liabilities and obligations
incurred by it prior to the assignment, sale or transfer.
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer may be a party to the related pooling and servicing agreement
or may be appointed by the master servicer or another specified party to
perform certain specified duties in respect of servicing the related mortgage
loans that would otherwise be performed by the master servicer. The rights and
obligations of any special servicer will be specified in the related prospectus
supplement, and the master servicer will be liable for the performance of a
special servicer only if, and to the extent, set forth in the prospectus
supplement.
Events of Default
Events of default under each pooling and servicing agreement will generally
consist of:
. any failure by the master servicer to distribute or cause to be
distributed to certificateholders of any class any required payment,
other than an Advance, which continues unremedied for five business days
after the giving of written notice of the failure to the master servicer
by the trustee or the depositor, or to the master servicer, the
depositor and the trustee by the holders of certificates of the class
evidencing not less than 25% of that class, based on the outstanding
principal balances of the certificates;
. any failure by the master servicer to make an Advance as required under
the pooling and servicing agreement, unless cured as specified in the
pooling and servicing agreement;
. any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the pooling
and servicing agreement
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which continues unremedied for sixty days after the giving of written
notice of the failure to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the trustee by
the holders of certificates evidencing not less than 50% of the related
trust fund, based on the outstanding principal balances of the
certificates; and
. certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceeding and certain actions by or on
behalf of the master servicer indicating its insolvency, reorganization
or inability to pay its obligations.
Material variations to the above events of default, other than to shorter cure
periods or eliminate notice requirements, will be specified in the related
prospectus supplement.
If specified in the related prospectus supplement, the pooling and servicing
agreement will permit the trustee to sell the mortgage loans and the other
assets of the trust fund in the event that payments in respect thereto are
insufficient to make payments required in the pooling and servicing agreement.
The assets of the trust fund will be sold only under the circumstances and in
the manner specified in the related prospectus supplement.
Rights upon Event of Default
So long as an event of default under the related pooling and servicing
agreement remains unremedied, the trustee may, and at the direction of holders
of certificates having not less than 50% of the related trust fund, based on
the outstanding principal balances of the certificates, and under other
circumstances as may be specified in the pooling and servicing agreement, the
trustee shall, terminate all of the rights and obligations of the master
servicer under the pooling and servicing agreement relating to the trust fund
and in and to the mortgage loans, whereupon the trustee will succeed to all of
the responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement, including, if specified in the related
prospectus supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the trustee is unwilling
or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a mortgage loan servicing institution with
a net worth of at least $50,000,000 to act as successor to the master servicer
under the pooling and servicing agreement. Pending the appointment, the trustee
is obligated to act in this capacity. The trustee and any successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation payable to the master servicer under the pooling and
servicing agreement.
No certificateholder, solely by virtue of the holder's status as a
certificateholder, will have any right under any pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement, unless the holder previously has given to the trustee written notice
of default and unless the holders of certificates of any class of that series
evidencing not less than 50% of the related trust fund, based on the
outstanding principal balances of the certificates, have made written request
upon the trustee to institute the proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity, and the
trustee for 60 days has neglected or refused to institute any proceeding.
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Amendment
Unless otherwise specified in the related prospectus supplement, each pooling
and servicing agreement may be amended by the depositor, the master servicer
and the trustee, without the consent of any of the certificateholders:
. to cure any ambiguity or mistake;
. to correct or supplement any provision in the pooling and servicing
agreement which may be defective or inconsistent with any of its other
provisions or with the related prospectus supplement or prospectus or to
correct any error or mistake;
. to obtain, maintain or improve the rating of any class of certificates,
it being understood that after obtaining any rating required at the
initial issuance of the related series, none of the depositor, master
servicer or trustee is obligated to obtain, maintain or improve the
rating of any class of certificates of the series; or
. to make any other revisions with respect to matters or questions arising
under the pooling and servicing agreement which are not materially
inconsistent with the pooling and servicing agreement, provided that, in
the case of this clause, any action will not adversely affect in any
material respect the interests of any certificateholder.
An amendment will be deemed not to adversely affect in any material respect the
interests of the certificateholders if the person requesting the amendment
obtains a letter from each rating agency requested to rate the class or classes
of certificates of the series stating that the amendment will not result in the
downgrading or withdrawal of the respective ratings then assigned to the
certificates. In addition, to the extent provided in the related pooling and
servicing agreement, the pooling and servicing agreement may be amended without
the consent of any of the certificateholders, to change the manner in which the
Collection Account is maintained, provided that any change does not adversely
affect the then current rating on the class or classes of certificates of the
series that have been rated. In addition, if a REMIC election or FASIT election
is made with respect to a trust fund, the related pooling and servicing
agreement may be amended to modify, eliminate or add to any of its provisions
to the extent as may be necessary to maintain the qualification of the related
trust fund as a REMIC or FASIT, provided that the trustee has received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain the qualification.
Unless otherwise specified in the related prospectus supplement, each pooling
and servicing agreement may also be amended by the depositor, the master
servicer and the trustee with consent of holders of certificates of the series
evidencing not less than 51% of the aggregate percentage interests of each
class affected thereby for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the related pooling and
servicing agreement or of modifying in any manner the rights of the holders of
the related certificates; provided, however, no amendment may:
. reduce in any manner the amount of or delay the timing of, payments
received on mortgage loans which are required to be distributed on any
certificate without the consent of the holder of that certificate, or
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. reduce the percentage of certificates of any class of holders which are
required to consent to any amendment without the consent of the holders
of all certificates of the class covered by the pooling and servicing
agreement then outstanding.
If a REMIC election or FASIT election is made with respect to a trust fund, the
trustee will not be entitled to consent to an amendment to the related pooling
and servicing agreement without having first received an opinion of counsel to
the effect that the amendment will not cause the trust fund to fail to qualify
as a REMIC or FASIT, as the case may be, at any time the related certificates
are outstanding.
Termination; Optional Termination
The obligations created by each pooling and servicing agreement for each
series of certificates will terminate upon the payment to the related
certificateholders of all amounts held in the Collection Account or by the
master servicer or the trustee and required to be paid to them under the
pooling and servicing agreement following the later of:
. the final payment or other liquidation of the last of the mortgage loans
subject thereto or the disposition of all property acquired upon
foreclosure of any mortgage loans remaining in the trust fund and
. the purchase from the related trust fund of all of the remaining
mortgage loans and all property acquired in respect of the mortgage
loans by the party named in the applicable prospectus supplement.
Subject to the provisions of the applicable pooling and servicing agreement,
the depositor, the master servicer or any other party specified in the related
prospectus supplement may, at any party's option, repurchase:
. any mortgage loan which is in default or as to which default is
reasonably foreseeable if, in the depositor's, the master servicer's or
any other party's judgment, the related default is not likely to be
cured by the borrower or default is not likely to be averted, and
. any mortgage loan as to which the originator of the mortgage loan
breached a representation or warranty to JVMC as to the characteristics
of the mortgage loans, at a price equal to the unpaid principal balance
of the mortgage loan plus accrued interest thereon and under the
conditions set forth in the applicable prospectus supplement.
The Trustee
The trustee under each pooling and servicing agreement will be named in the
applicable prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor, the master
servicer and any of their respective affiliates.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the mortgage loans. Because these legal
aspects are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the mortgage loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
mortgage loans may be originated.
General
The mortgage loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates
a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage,
the mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the grantor/trustor (similar to a mortgagor), a
lender called the beneficiary (similar to a mortgagee) and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed
and a deed to secure debt are special types of deeds which indicate on their
face that they are granted to secure an underlying debt. By executing a
security deed or deed to secure debt, the grantor conveys title to, as opposed
to merely creating a lien upon, the subject property to the grantee until the
time the underlying debt is repaid. The trustee's authority under a deed of
trust, the mortgagee's authority under a mortgage and the grantee's authority
under a security deed or deed to secure debt are governed by law and, with
respect to some deeds of trust, the directions of the beneficiary.
Home Ownership and Equity Protection Act of 1994
The mortgage loans may be subject to the Home Ownership Act which amended the
Truth-in-Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of the disclosures and limits or prohibits inclusion of certain
provisions in mortgages subject to the Home Ownership Act. In addition, it is
possible that some of the mortgage loans will be subject to the Riegle Act
which incorporates the Home Ownership Act. The Riegle Act adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-In-
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Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans
with high interest rates or high upfront fees and charges. In general, mortgage
loans within the purview of the Riegle Act have annual percentage rates over
10% greater than the yield on Treasury Securities of comparable maturity and/or
fees and points which exceed the greater of 8% of the total loan amount or
$400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The Home Ownership Act
and the Riegle Act also provide that any purchaser or assignee of a mortgage
covered by the laws is subject to all of the claims and defenses which the
borrower could assert against the original lender. If the trust fund includes
mortgage loans subject to the Home Ownership Act or the Riegle Act, it will be
subject to all of the claims and defenses which the borrower could assert
against an originator. Any violation of the Home Ownership Act or the Riegle
Act which would result in this liability would be a breach of the depositor's
representations and warranties, and the depositor would be obligated to cure,
repurchase or, if permitted by the pooling and servicing agreement, substitute
for the mortgage loan in question.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on certain loans. It is anticipated that prepayment charges may
not be imposed with respect to many of the mortgage loans. The absence of this
restraint on prepayment, particularly with respect to fixed rate mortgage loans
having higher Mortgage Rates or APRs, may increase the likelihood of
refinancing or other early retirement of the loans or contracts.
Cooperatives
Certain of the mortgage loans may be Cooperative Loans. The Cooperative owns
all the real property that comprises the project, including the land, separate
dwelling units and all common areas. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to
the interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and
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its consequent inability to make the final payment could lead to foreclosure by
the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of Cooperative shares or, in the case of a trust
fund including Cooperative Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing the tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the Cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring the approval could limit the number of potential
purchasers for those shares and otherwise limit the trust fund's ability to
sell and realize the value of those shares.
In general, a "tenant-stockholder", as defined in Code Section 216(b)(2), of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which these items are allowable as a
deduction to the corporation, that section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its tenant-
stockholders. By virtue of this
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requirement, the status of a corporation for purposes of Code Section 216(b)(1)
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify
under that section for any particular year. In the event that the Cooperative
fails to qualify for one or more years, the value of the collateral securing
any related Cooperative Loans could be significantly impaired because no
deduction would be allowable to tenant-stockholders under Code Section 216(a)
with respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that the failure would be permitted to continue over
a period of years appears remote.
Foreclosure/Repossession
Deed of Trust
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In certain states, the
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lienholder. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings sometimes are not contested by
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any of the parties. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of a judicial foreclosure proceeding, the court generally issues
a judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In general, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the absence of
equity in the property, the difficulty of determining the exact status of title
to the property, the possible deterioration of the property during the
foreclosure proceedings and a requirement that the purchaser pay to bid for the
property. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making the repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing adequately to maintain the property or
the borrower executing a second security instrument affecting the property.
Some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for fair notice
require that borrowers under deeds of trust receive notice longer than that
prescribed by statute. For the most part, these cases have
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upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust does not involve sufficient state action to
afford constitutional protection to the borrower.
Junior Mortgages
Some of the mortgages may be junior liens subordinate to the rights of the
mortgagee under the related senior mortgage or mortgages, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of the junior mortgage only to the extent that the
claims of the senior mortgagees have been satisfied in full, including any
related foreclosure costs. In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject to the
senior mortgages, in which case it must either pay the entire amount due on the
senior mortgages to the senior mortgagees at or prior to the foreclosure sale
or undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder. The trust fund will not have any
source of funds to satisfy the senior mortgages to make payments due to the
senior mortgagees.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the tenant-
stockholder. The proprietary lease or occupancy agreement generally permits the
Cooperative to terminate the lease or agreement in the event an obligor fails
to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the Cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the tenant-
stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
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Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "--Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Rights of Redemption
In some states after sale under a deed of trust or foreclosure of a mortgage,
the borrower and certain foreclosed junior lienors are given a statutory period
in which to redeem the property from the foreclosure sale. In certain other
states, including California, this right of redemption applies only to sales
following judicial foreclosure, and not to sales under a non-judicial power of
sale. In most states where the right of redemption is available, statutory
redemption may occur upon payment of the foreclosure purchase price, accrued
interest and taxes. In some states, the right to redeem is an equitable right.
The effect of a right of redemption is to diminish the ability of the lender to
sell the foreclosed property. The exercise of a right of redemption would
defeat the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to judicial foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
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Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares and
the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral, which, in the case of a mortgage loan secured by
shares of a cooperative, would be the shares and the related proprietary lease
or occupancy agreement, was conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, and
state laws affording relief to debtors may interfere with or affect the ability
of a secured mortgage lender to obtain payment of a mortgage loan, to realize
upon collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions are automatically stayed upon the filing
of a bankruptcy petition, and, usually, no interest or principal payments are
made during the course of the bankruptcy case. Foreclosure of an interest in
real property of a debtor in a case under the Bankruptcy Code can typically
occur only if the bankruptcy court vacates the stay, an action, the court may
be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences of the delay caused by the automatic
stay can be significant. Also, under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a junior lien holder may stay a
senior lender from taking action to foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code:
. Under Chapter 7, the assets of the debtor are liquidated and a lender
secured by a lien may "bid in" at the sale of the asset. "Bid in" means
to bid up to the amount of the debt. See " Foreclosure/Repossession."
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. Under Chapter 11 a homeowner can reorganize his or her debts through his
or her reorganization plan.
. Under Chapter 13 a homeowner can address his or her debts in a
rehabilitation plan. Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to
restructure their debts file for relief under Chapter 13 rather than
Chapter 11.
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may
include a reduction in the amount of each scheduled payment, which reduction
may result from a reduction in the rate of interest, an alteration of the
repayment schedule, an extension of the final maturity date, and/or a reduction
in the outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under
Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to
the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
with respect to a mortgage loan on the debtor's residence by paying arrearages
over a period of time and to deaccelerate and reinstate the original mortgage
loan payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court, provided no sale of
the property had yet occurred, prior to the filing of the debtor's petition
under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
with the term commencing when repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender
if the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal residence and by collateral that is not "inextricably bound"
to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under
the debtor's Chapter 13 plan, which date could be up to five years after the
debtor emerges from bankruptcy. Under several
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recently decided cases, the terms of this type loan can be modified in the
manner described above. While these decisions are contrary to the holding in a
prior case by a senior appellate court, it is possible that the later decisions
will become the accepted interpretation in view of the language of the
applicable statutory provision. If this interpretation is adopted by a court
considering the treatment in a Chapter 13 repayment plan of a mortgage loan, it
is possible that the mortgage loan could be modified.
State statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of a payment
to the lender. Moreover, the laws of certain states also give priority to
certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
The TILA Amendment is bankruptcy reform legislation that is being considered
by the Senate. As most recently proposed, the TILA Amendment would apply
retroactively to secured debt incurred by a debtor prior to the date of
effectiveness of the legislation, including the mortgage loans. The House bill
does not include a comparable provision as of the date hereof. If the TILA
Amendment were to become law, a violation of the Truth in Lending Act with
respect to a mortgage loan could result in a total loss with respect to the
loan in a bankruptcy proceeding. Any violation would be a breach of
representation and warranty of the depositor, and the depositor would be
obligated to repurchase the mortgage loan.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the mortgage loans in a trust have been considered by
Congress, and more proposed legislation may be considered in the future. No
assurance can be given that any particular proposal will or will not be enacted
into law, or that any provision so enacted will not differ materially from the
proposals described above.
The mortgage loans are also subject to federal laws, including:
. the federal Truth-in-Lending Act and Regulation Z promulgated under that
act, which require certain disclosures to the borrowers regarding the
terms of the mortgage loans;
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. the Equal Credit Opportunity Act and Regulation B promulgated under that
act, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
. the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and
. the Home Ownership and Equity Protection Act of 1994.
These and other federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and enforcement of mortgage loans. Violations of certain provisions
of these laws:
. may limit the ability of the master servicer to collect all or part of
the principal of or interest on the mortgage loans,
. may subject the master servicer to damages and administrative
enforcement and
. could be raised by borrowers as a recoupment or setoff in a collection
or foreclosure action.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction,
except for rate/term refinance loans and certain other narrow exceptions,
secured by a Texas resident's principal residence is subject to the provisions
of the Texas Home Equity Laws. The Texas Home Equity Laws provide for:
. certain disclosure requirements,
. caps on allowable fees,
. required loan closing procedures and
. certain other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render
the mortgage loan unenforceable and/or the lien on the Mortgaged Property
invalid. Because mortgage loans which are subject to the Texas Home Equity Laws
can be foreclosed only by court order, rather than non-judicial foreclosure as
is available for other types of mortgage loans in Texas, delays and increased
losses may result in connection with foreclosures of these loans. If a court
were to find that any requirement of the Texas Home Equity Laws was not
complied with, the court could
. refuse to allow foreclosure to proceed,
. declare the lien on the Mortgaged Property to be invalid, and/or
. require the originating lender or the holder of the note to forfeit some
or all principal and interest of the related mortgage loan.
Title insurance generally available on mortgage loans may exclude coverage for
some of the risks described in this paragraph.
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Environmental Risks
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things:
. emissions of air pollutants;
. discharges of wastewater or storm water;
. generation, transport, storage or disposal of hazardous waste or
hazardous substances;
. operation, closure and removal of underground storage tanks;
. removal and disposal of asbestos-containing materials; and/or
. management of electrical or other equipment containing polychlorinated
biphenyls.
Failure to comply with these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on the property are subordinated to this type of
lien and, in some states, even prior recorded liens are subordinated to these
liens. In the latter states, the security interest of the trustee in a property
that is subject to this type of lien could be adversely affected.
Under CERCLA and under state law in certain states, a secured party which
takes a deed in lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, operates a mortgaged property or undertakes certain types of
activities that may constitute management of the mortgaged property may become
liable in certain circumstances for the costs of remedial action or cleanup
costs, if hazardous wastes or hazardous substances have been released or
disposed of on the property. The cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances cleanup
costs, or the obligation to take remedial actions, could be imposed on a
secured lender. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if the lender or its
agents or employees have "participated in the management" of the operations of
the borrower, even though the environmental damage or
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threat was caused by a prior owner or current owner or operator or other third
party. CERCLA has a "secured-creditor exemption" which excludes a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" from CERCLA's
definition of "owner or operator". This exemption for holders of a security
interest such as a secured lender applies only to the extent that a lender
seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of the facility or property, the lender faces potential liability as
an "owner or operator" under CERCLA. Similarly, when a lender forecloses and
takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment, including leasing the
facility or property to a third party, fails to market the property in a timely
fashion or fails to properly address environmental conditions at the property
or facility.
RCRA contains a similar secured-creditor exemption for those lenders who hold
a security interest in a petroleum underground storage tank or in real estate
containing an underground storage tank, or that acquire title to a petroleum
underground storage tank or facility or property on which an underground
storage tank is located. As under CERCLA, a lender may lose its secured-
creditor exemption and be held liable under RCRA as an underground storage tank
owner or operator if the lender or its employees or agents participate in the
management of the underground storage tank. In addition, if the lender takes
title to or possession of the underground storage tank or the real estate
containing the underground storage tank, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the Eleventh
Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a
lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence the
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the secured-creditor
exemption, leading to administrative and legislative efforts to provide
guidance to lenders on the scope of activities that would trigger CERCLA and/or
RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
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However, the Asset Conservation Act, which was adopted in 1996, was intended
to clarify the scope of the secured creditor exemption under both CERCLA and
RCRA. The Asset Conservation Act more explicitly defined the kinds of
"participation in management" that would trigger liability under CERCLA and
specified certain activities that would not constitute "participation in
management" or otherwise result in a forfeiture of the secured-creditor
exemption prior to foreclosure or during a workout period. The Asset
Conservation Act also clarified the extent of protection against liability
under CERCLA in the event of foreclosure and authorized certain regulatory
clarifications of the scope of the secured-creditor exemption for purposes of
RCRA, similar to the statutory protections under CERCLA. However, since the
courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an action
for contribution against the owner or operator who created the environmental
contamination or against some other liable party, but that person or entity may
be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup
or other environmental liability costs could become a liability of the trust
fund and occasion a loss to the trust fund and to certificateholders in certain
circumstances. The new secured creditor amendments to CERCLA, also, would not
necessarily affect the potential for liability in actions by either a state or
a private party under other federal or state laws which may impose liability on
"owners or operators" but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor, any originator or the master servicer makes any representations or
warranties or assumes any liability with respect to:
. environmental conditions of the Mortgaged Property;
. the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property;
. the impact on certificateholders of any environmental condition or
presence of any substance on or near the Mortgaged Property;
. or the compliance of any Mortgaged Property with any environmental laws.
In addition, no agent, person or entity otherwise affiliated with the
depositor is authorized or able to make this representation, warranty or
assumption of liability relative to any Mortgaged Property.
Due-On-Sale Clauses
Unless otherwise provided in the related prospectus supplement, each
conventional mortgage loan will contain a due-on-sale clause which will
generally provide that if the
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mortgagor or obligor sells, transfers or conveys the Mortgaged Property, the
loan may be accelerated by the mortgagee. In recent years, court decisions and
legislative actions placed substantial restriction on the right of lenders to
enforce these clauses in many states. For instance, the California Supreme
Court in August 1978 held that due-on-sale clauses were generally
unenforceable. However, the Garn-St Germain Act subject to certain exceptions,
preempts state constitutional, statutory and case law prohibiting the
enforcement of due-on-sale clauses. Regulations promulgated under the Garn-St
Germain Act also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan under a due-on-sale clause. As to loans secured by an
owner-occupied residence, the Garn-St Germain Act sets forth nine specific
instances in which a mortgagee covered by the Act may not exercise its rights
under a due-on-sale clause, notwithstanding the fact that a transfer of the
property may have occurred. The inability to enforce a due-on-sale clause may
result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default or may result in a
mortgage bearing an interest rate below the current market rate being assumed
by a new home buyer, which may affect the average life of the mortgage loans
and the number of mortgage loans which may extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. The absence of this restraint on prepayment, particularly with
respect to fixed-rate mortgage loans having higher Mortgage Rates, may increase
the likelihood of refinancing or other early retirement of these loans or
contracts.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk.
. First, the mortgagor may have difficulty servicing and repaying multiple
loans. In addition, if the junior loan permits recourse to the
mortgagor, as junior loans often do, and the senior loan does not, a
mortgagor may be more likely to repay sums due on the junior loan than
those on the senior loan.
. Second, acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the mortgagor and the senior
lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority
to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened.
. Third, if the mortgagor defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980, provides that state usury limitations shall not
apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. The Office of Thrift Supervision, as
successor to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized the states to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
an application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of the
mortgage loans, any limitation under the state's usury law would not apply to
the mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of the state action will be eligible for
inclusion in a trust fund unless:
. the mortgage loan provides for interest rate, discount points and
charges as are permitted in the particular state or
. the mortgage loan provides that its terms shall be construed in
accordance with the laws of another state under which the interest rate,
discount points and charges would not be usurious and the mortgagor's
counsel has rendered an opinion that the choice of law provision would
be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage
or deed of trust without any payment or prohibiting the lender from
foreclosing.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended, a borrower who enters military service after the origination
of the borrower's mortgage loan, including a borrower who is a member of the
National Guard or is in reserve status at the time of the origination of the
mortgage loan and is later called to active
96
duty, may not be charged interest above an annual rate of 6% during the period
of the borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that the interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the master servicer to collect full amounts of interest on certain of the
mortgage loans. Any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the master servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status. Thus, in the event
that this type of mortgage loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged property in a
timely fashion.
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the certificates offered hereunder. This
discussion is directed solely to certificateholders that hold the certificates
as capital assets within the meaning of Section 1221 of the Code, and does not
purport to discuss all federal income tax consequences that may be applicable
to particular categories of investors, some of which such as banks, insurance
companies and foreign investors may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
certificates. See "State, Local and Other Tax Considerations."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the certificates offered hereunder.
The following discussion addresses securities of two general types:
.REMIC Certificates and
.Grantor Trust Certificates
The prospectus supplement for each series of certificates will indicate which
of the treatments will apply to the series and, if a REMIC election will be
made for the related trust fund, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion
references to a "certificateholder" or a "holder" are to the beneficial owner
of a certificate. The discussion below assumes that no election will be made to
treat the trust fund, or any portion of the trust fund, as a FASIT under
Sections 860H through 860L of the Code. If a FASIT election is made for a
particular series, the prospectus
97
supplement for that series will address the material federal income tax
consequences of the election.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the OID Regulations, and in part upon the REMIC Regulations. The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
certificates.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of Taxable Mortgage
Pools. Any entity other than a REMIC or a FASIT will be considered a Taxable
Mortgage Pool if:
. substantially all of the assets of the entity consist of debt
obligations and more than 50% of the obligations consist of "real estate
mortgages,"
. the entity is the obligor under debt obligations with two or more
maturities, and
. under the terms of the debt obligations on which the entity is the
obligor, payments on the obligations bear a relationship to payments on
the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Certificates to
avoid the application of the Taxable Mortgage Pool rules.
REMICs
Classification of REMICs
With respect to each series of REMIC Certificates, assuming compliance with
all provisions of the related pooling and servicing agreement, the related
trust fund will qualify as a REMIC and the REMIC Certificates offered with
respect thereto will be considered Regular Certificates or Residual
Certificates in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the Startup Day and at all times
thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor under
which the de minimis requirement will be met if at all times the aggregate
adjusted
98
basis of the nonqualified assets is less than 1% of the aggregate adjusted
basis of all the REMIC Pool's assets. An entity that fails to meet the safe
harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents of "disqualified organizations" and must
furnish applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement with respect to each series of
REMIC Certificates will contain provisions meeting these requirements. See "--
Taxation of Owners of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter under a fixed price contract in effect on the Startup Day. Qualified
mortgages include whole mortgage loans, such as the mortgage loans, and,
generally, certificates of beneficial interest in a grantor trust that holds
mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if
it were transferred to the REMIC Pool on the Startup Day and that is received
either:
. in exchange for any qualified mortgage within a three-month period
thereafter or
. in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
. a mortgage in default or as to which default is reasonably foreseeable,
. a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC pool has been breached,
. a mortgage that was fraudulently procured by the mortgagor, and
. a mortgage that was not in fact principally secured by real property,
but only if the mortgage is disposed of within 90 days of discovery.
A mortgage loan that is "defective" as described in the last clause above
that is not sold or, if within two years of the Startup Day, exchanged, within
90 days of discovery, ceases to be a qualified mortgage after the 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests
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in the event of defaults, including delinquencies, on the qualified mortgages,
lower than expected reinvestment returns, prepayment interest shortfalls and
certain other contingencies. The reserve fund will be disqualified if more than
30% of the gross income from the assets in the fund for the year is derived
from the sale or other disposition of property held for less than three months,
unless required to prevent a default on the regular interests caused by a
default on one or more qualified mortgages. A reserve fund must be reduced
"promptly and appropriately" as payments on the mortgage loans are received.
Foreclosure property is real property acquired by the REMIC Pool in connection
with the default or imminent default of a qualified mortgage and generally may
not be held beyond the third calendar year following the year of acquisition
unless extensions are granted by the Secretary of the Treasury.
In addition to the above requirements, the various interests in a REMIC Pool
also must meet certain requirements. All of the interests in a REMIC Pool must
be either of the following:
. one or more classes of regular interests or
. a single class of residual interests on which distributions, if any, are
made pro rata.
A regular interest is an interest in a REMIC Pool that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount, or
other similar amount, and provides that interest payments, or other similar
amounts, if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. This specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
the interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments,
lower than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to
that series will constitute a single class of residual interests with respect
to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for this status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, the entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below.
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Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status, no
regulations have been issued. Any relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
trust fund's income for the period in which the requirements for the status are
not satisfied. The pooling and servicing agreement with respect to each REMIC
Pool will include provisions designed to maintain the trust fund's status as a
REMIC under the REMIC Provisions. It is not anticipated that the status of any
trust fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of
the REMIC Pool underlying the certificates would be so treated. Moreover, if
95% or more of the assets of the REMIC Pool qualify for either of the
treatments at all times during a calendar year, the REMIC certificates will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Loans, it is possible that the
percentage of the assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buydown Funds. Interest, including original issue discount, on the
Regular Certificates and income allocated to the class of Residual Certificates
will be interest described in Section 856(c)(3)(B) of the Code to the extent
that the certificates are treated as "real estate assets" within the meaning of
Section 856(c)(4)(A) of the Code. In addition, the Regular Certificates
generally will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests therein. Regular Certificates held
by a FASIT will qualify for treatment as "permitted assets" within the meaning
of Section 860L(c)(1)(G) of the Code. The determination as to the percentage of
the REMIC Pool's assets that constitute assets described in the above mentioned
sections of the Code will be made with respect to each calendar quarter based
on the average adjusted basis of each category of the assets held by the REMIC
Pool during that calendar quarter. The REMIC will report those determinations
to certificateholders in the manner and at the times required by applicable
Treasury regulations. The SBJA of 1996 repealed the reserve method of bad debts
of domestic building and loan associations and mutual savings banks, and thus
has eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirements in the SBJPA of 1996 that these institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if the loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans
of any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Certificates
and property acquired
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by foreclosure held pending sale, and may include amounts in reserve accounts.
It is unclear whether property acquired by foreclosure held pending sale and
amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether the assets, to the extent not invested in assets described in
the above sections, otherwise would receive the same treatment as the mortgage
loans for purposes of all of the above sections. The REMIC Regulations do
provide, however, that payments on mortgage loans held pending distribution are
considered part of the mortgage loans for purposes of Section 856(c)(4)(A) of
the Code. Furthermore, foreclosure property generally will qualify as "real
estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related trust fund as Tiered REMICs
for federal income tax purposes. Upon the issuance of any series of REMIC
Certificates, Cadwalader, Wickersham & Taft will deliver its opinion generally
to the effect that, assuming compliance with all provisions of the related
pooling and servicing agreement, the Tiered REMICs will each qualify as a REMIC
and the REMIC Certificates issued by the Tiered REMICs will be considered to
evidence ownership of Regular Certificates or Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Certificates
General. In general, interest, original issue discount, and market discount
on a Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate, and principal payments on a Regular Certificate will be
treated as a return of capital to the extent of the regular certificateholder's
basis in the Regular Certificate allocable thereto. Regular certificateholders
must use the accrual method of accounting with regard to Regular Certificates,
regardless of the method of accounting otherwise used by the regular
certificateholder.
Original Issue Discount. Accrual Certificates will be, and other classes of
Regular Certificates may be, issued with "original issue discount" within the
meaning of Code Section 1273(a). Holders of any class of Regular Certificates
having original issue discount generally must include original issue discount
in ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the receipt of the cash attributable to the income. The
following discussion is based in part on temporary and final OID Regulations
and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however,
102
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates. To the extent these
issues are not addressed in the regulations, the depositor intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect
on the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Certificates.
Each Regular Certificate, except for Non-Pro Rata Certificate, will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a regular certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over
its "issue price." The issue price of a class of Regular Certificates offered
by this prospectus generally is the first price at which a substantial amount
of the class is sold to the public, excluding bond houses, brokers and
underwriters. Although unclear under the OID Regulations, it is anticipated
that the trustee will treat the issue price of a class as to which there is no
substantial sale as of the issue date or that is retained by the depositor as
the fair market value of the class as of the issue date. The issue price of a
Regular Certificate also includes any amount paid by an initial Regular
certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular certificateholder
elects on its federal income tax return to exclude this amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if the distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or a qualified variable rate, provided
that the interest payments are unconditionally payable at intervals of one year
or less during the entire term of the Regular Certificate. Because there is no
penalty or default remedy in the case of nonpayment of interest with respect to
a Regular Certificate, it is possible that no interest on any class of Regular
Certificates will be treated as qualified stated interest. However, except as
provided in the following three sentences or in the applicable prospectus
supplement, because the underlying mortgage loans provide for remedies in the
event of default, it is anticipated that the trustee will treat interest with
respect to the Regular Certificates as qualified stated interest. Distributions
of interest on an Accrual Certificate, or on other Regular Certificates with
respect to which deferred interest will accrue, will not constitute qualified
stated interest, in which case the stated redemption price at maturity of the
Regular Certificates includes all distributions of interest as well as
principal thereon. Likewise, it is anticipated that the trustee will treat an
interest-only class or a class on which interest is substantially
disproportionate to its principal amount, a so-called "super-premium" class, as
having no qualified stated interest. Where the interval
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between the issue date and the first Distribution Date on a Regular Certificate
is shorter than the interval between subsequent Distribution Dates, the
interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of full
years from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
The Conference Committee Report to the 1986 Act provides that the schedule of
the distributions should be determined in accordance with the Prepayment
Assumption and the anticipated reinvestment rate, if any, relating to the
Regular Certificates. The Prepayment Assumption with respect to a series of
Regular Certificates will be set forth in the applicable prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and the income will be capital gain if the
Regular Certificate is held as a capital asset. Under the OID Regulations,
however, Regular certificateholders may elect to accrue all de minimis original
issue discount as well as market discount and market premium, under the
constant yield method. See "--Election to Treat All Interest Under the Constant
Yield Method."
A Regular certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period, or shorter period from the date of original issue, that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of:
. the sum of:
(1) the present value of all of the remaining distributions to be made
on the Regular Certificate as of the end of that accrual period,
and
(2) the distributions made on the Regular Certificate during the
accrual period that are included in the Regular Certificate's
stated redemption price at maturity, over
. the adjusted issue price of the Regular Certificate at the beginning of
the accrual period.
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The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
. the yield to maturity of the Regular Certificate at the issue date,
. events, including actual prepayments, that have occurred prior to the
end of the accrual period, and
. the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Certificate at the
beginning of any accrual period equals the issue price of the Regular
Certificate, increased by the aggregate amount of original issue discount with
respect to the Regular Certificate that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular
Certificate's stated redemption price at maturity that were made on the Regular
Certificate in the prior periods. The original issue discount accruing during
any accrual period will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a regular certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally will decrease, but not below zero for any
period, if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the mortgage loans with respect to a series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to the Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the trustee
will determine the yield to maturity of that certificate based upon the
anticipated payment characteristics of the class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Certificate in a full accrual period would be its allocable share
of the original issue discount with respect to the entire class, as determined
in accordance with the preceding paragraph. However, in the case of a
distribution in retirement of the entire unpaid principal balance of any Non-
Pro Rata Certificate or portion of the unpaid principal balance;
. the remaining unaccrued original issue discount allocable to that
certificate, or to a portion, will accrue at the time of the
distribution, and
. the accrual of original issue discount allocable to each remaining
certificate of the class will be adjusted by reducing the present value
of the remaining payments on the class and the adjusted issue price of
the class to the extent attributable to the portion of the unpaid
principal balance of the class that was distributed.
105
The depositor believes that the above treatment is consistent with the "pro
rata prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
Acquisition Premium. A purchaser of a Regular Certificate having original
issue discount at a price greater than its adjusted issue price but less than
its stated redemption price at maturity will be required to include in gross
income the daily portions of the original issue discount on the Regular
Certificate reduced pro rata by a fraction, the numerator of which is the
excess of its purchase price over the adjusted issue price and the denominator
of which is the excess of the remaining stated redemption price at maturity
over the adjusted issue price. Alternatively, a subsequent purchaser may elect
to treat all acquisition premium under the constant yield method, as described
below under the heading "--Election to Treat All Interest Under the Constant
Yield Method."
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. Under the OID Regulations, interest is
treated as payable at a variable rate if, generally:
. the issue price does not exceed the original principal balance by more
than a specified amount and
. the interest compounds or is payable at least annually at current values
of
(1)one or more "qualified floating rates,"
(2)a single fixed rate and one or more qualified floating rates,
(3)a single "objective rate," or
(4) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either:
. the product of a qualified floating rate and a fixed multiple that is
greater than 0.65 but not more than 1.35 or
. the product of a qualified floating rate and a fixed multiple that is
greater that 0.65 but not more than 1.35, increased or decreased by a
fixed rate.
This type of rate may also be subject to a fixed cap or floor, or a cap or
floor that is not reasonably expected as of the issue date to affect the yield
of the instrument significantly. An objective rate is any rate, other than a
qualified floating rate, that is determined using a single fixed formula and
that is based on objective financial or economic information, provided that the
information is not:
. within the control of the issuer or a related party or
. unique to the circumstances of the issuer or a related party.
106
A qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate. A class
of Regular Certificates may be issued under this prospectus that does not have
a variable rate under the above mentioned rules, for example, a class that
bears different rates at different times during the period it is outstanding so
that it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that this type class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However,
if final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, the regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of these principles could lead to
the characterization of gain on the sale of contingent interest Regular
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Certificate that does not
pay interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate
. bearing interest at a rate that qualifies as a variable rate under the
OID Regulations that is tied to current values of a variable rate, or
the highest, lowest or average of two or more variable rates, including
a rate based on the average cost of funds of one or more financial
institutions, or a positive or negative multiple of a rate, plus or
minus a specified number of basis points, or that represents a weighted
average of rates on some or all of the mortgage loans, including a rate
that is subject to one or more caps or floors, or
. bearing one or more variable rates for one or more periods, or one or
more fixed rates for one or more periods, and a different variable rate
or fixed rate for other periods, qualifies as a regular interest in a
REMIC.
Accordingly, unless otherwise indicated in the applicable prospectus
supplement, it is anticipated that the trustee will treat Regular Certificates
that qualify as regular interests under this rule in the same manner as
obligations bearing a variable rate for original issue discount reporting
purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on the Regular Certificate generally to be determined by assuming that
interest will be payable for the life of the Regular Certificate based on the
initial rate or, if different, the value of the applicable variable rate as of
the pricing date for the relevant class. Unless required otherwise by
applicable final regulations or as specified in the applicable prospectus
supplement, it is anticipated that the trustee will treat the variable interest
as qualified stated interest, other than variable interest on an interest-only
or super-premium class which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity. Ordinary
107
income reportable for any period will be adjusted based on subsequent changes
in the applicable interest rate index.
Market Discount. A subsequent purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Certificate
. is exceeded by the remaining outstanding principal payments and interest
payments other than qualified stated interest payments due on a Regular
Certificate, or
. in the case of a Regular Certificate having original issue discount, is
exceeded by the adjusted issue price of the Regular Certificate at the
time of purchase.
The purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on the Regular Certificate as distributions
includible in the stated redemption price at maturity are received, in an
amount not exceeding any distribution. The market discount would accrue in a
manner to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until the regulations are issued, the market discount would accrue either
. on the basis of a constant interest rate, or
. in the ratio of stated interest allocable to the relevant period to the
sum of the interest for the period plus the remaining interest as of the
end of the period, or in the case of a Regular Certificate issued with
original issue discount, in the ratio of original issue discount accrued
for the relevant period to the sum of the original issue discount
accrued for the period plus the remaining original issue discount as of
the end of that period.
The purchaser also generally will be required to treat a portion of any gain on
a sale or exchange of the Regular Certificate as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
above mentioned methods, less any accrued market discount previously reported
as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. The purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of the interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for that year. Any deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the above
mentioned basis, the regular certificateholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the regular certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. See "--Election to
Treat All Interest Under the Constant Yield Method" below
108
regarding an alternative manner in which the election may be deemed to be made.
A person who purchases a regular certificate at a price lower than the
remaining amounts includible in the stated redemption price at maturity of the
security, but higher than its adjusted issue price, does not acquire the
regular certificate with market discount, but will be required to report
original issue discount, appropriately adjusted to reflect the excess of the
price paid over the adjusted issue price.
Market discount with respect to a Regular Certificate will be considered to
be zero if the market discount is less than 0.25% of the remaining stated
redemption price at maturity of the Regular Certificate, or, in the case of a
Regular Certificate having original issue discount, the adjusted issue price of
the Regular Certificate, multiplied by the weighted average maturity of the
Regular Certificate, determined as described above remaining after the date of
purchase. It appears that de minimis market discount would be reported in a
manner similar to de minimis original issue discount. See "--Original Issue
Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Certificate that has
"contingent interest" at a discount generally would continue to accrue interest
and determine adjustments on the Regular Certificate based on the original
projected payment schedule devised by the issuer of the security. The holder of
this type of Regular Certificate would be required, however, to allocate the
difference between the adjusted issue price of the Regular Certificate and its
basis in the Regular Certificate as positive adjustments to the accruals or
projected payments on the Regular Certificate over the remaining term of the
Regular Certificate in a manner that is reasonable or based on a constant yield
to maturity.
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. Due
to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given class of Regular Certificates. Prospective investors
in Regular Certificates should consult their own tax advisors regarding the
application of the market discount rules to the Regular Certificates. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Amortizable Premium. A Regular Certificate purchased at a cost greater than
its remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the regular certificateholder holds the Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
regular certificateholder may elect under Code Section 171 to amortize the
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificate. The election will apply
to all taxable debt obligations, including REMIC regular interests, acquired by
the regular certificateholder at a premium held in that taxable year or
thereafter, unless revoked with the permission of the Internal Revenue Service.
The Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the
109
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "--Market Discount" are
available. Amortizable bond premium generally will be treated as an offset to
interest income on a Regular Certificate, rather than as a separate deductible
item. See "--Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which the Code Section 171 election
may be deemed to be made.
Amortizable premium on a Regular Certificate that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the certificate's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization
during the period ending with the optional redemption date. Thus, a holder of a
Regular Certificate would not be able to amortize any premium on a Regular
Certificate that is subject to optional redemption at a price equal to or
greater than the Certificateholder's acquisition price unless and until the
redemption option expires. A Regular Certificate subject to redemption at the
option of the issuer described in the preceding sentence will be treated as
having matured on the redemption date for the redemption price and then as
having been reissued on that date for that price. Any premium remaining on the
Regular Certificate at the time of the deemed reissuance will be amortized on
the basis of:
. the original principal amount and maturity date or
. the price and date of any succeeding optional redemption, under the
principles described above.
Election to Treat All Interest Under the Constant Yield Method. A holder of a
debt instrument such as a Regular Certificate may elect to treat all interest
that accrues on the instrument using the constant yield method, with none of
the interest being treated as qualified stated interest. For purposes of
applying the constant yield method to a debt instrument subject to an election:
. ""interest'' includes stated interest, original issue discount, de
minimis original issue discount, market discount and de minimis market
discount, as adjusted by any amortizable bond premium or acquisition
premium and
. the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition.
It is unclear whether, for this purpose, the initial Prepayment Assumption
would continue to apply or if a new prepayment assumption as of the date of the
holder's acquisition would apply. A holder generally may make this type of
election on an instrument by instrument basis or for a class or group of debt
instruments. However, if the holder makes this type of election with respect to
a debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all premium bonds held or market discount bonds acquired by
the
110
holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the Internal Revenue
Service. Investors should consult their own tax advisors regarding the
advisability of making this type of election.
Treatment of Losses. Regular Certificateholders will be required to report
income with respect to Regular Certificates on the accrual method of
accounting, without giving effect to delays or reductions in distributions
attributable to defaults or delinquencies on the mortgage loans, except to the
extent it can be established that these losses are uncollectible. Accordingly,
the holder of a Regular Certificate, particularly a subordinate certificate,
may have income, or may incur a diminution in cash flow as a result of a
default or delinquency, but may not be able to take a deduction, subject to the
discussion below, for the corresponding loss until a subsequent taxable year.
In this regard, investors are cautioned that while they may generally cease to
accrue interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166. Under Code Section
166, it appears that Regular Certificateholders that are corporations or that
otherwise hold the Regular Certificates in connection with a trade or business
should in general be allowed to deduct as an ordinary loss the loss with
respect to principal sustained during the taxable year on account of any
Regular Certificates becoming wholly or partially worthless, and that, in
general, regular certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, the non-corporate
regular certificateholders should be allowed a bad debt deduction at the time
as the principal balance of the Regular Certificates is reduced to reflect
losses resulting from any liquidated mortgage loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect the losses only after all the mortgage
loans remaining in the trust fund have been liquidated or the applicable class
of regular certificates has been otherwise retired. The Internal Revenue
Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer the deductions for all
holders, such as reducing future cashflow for purposes of computing original
issue discount. This may have the effect of creating "negative" original issue
discount which would be deductible only against future positive original issue
discount or otherwise upon termination of the class. Regular Certificateholders
are urged to consult their own tax advisors regarding the appropriate timing,
amount and character of any loss sustained with respect to the Regular
Certificates. While losses attributable to interest previously reported as
income should be deductible as ordinary losses by both corporate and non-
corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Certificates in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including
111
rules regarding reserves for bad debts. The taxpayers are advised to consult
their tax advisors regarding the treatment of losses on Regular Certificates.
Sale or Exchange of Regular Certificates. If a regular certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and its adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the original cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller, by any amortized premium and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or short-
term depending on whether the Regular Certificate has been held for the long-
term capital gain holding period, currently, more than one year. This gain will
be treated as ordinary income:
. if a Regular Certificate is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that
would have accrued on the regular certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal
rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to
any prior disposition of property that was held as part of the
transaction,
. in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains
taxed as investment income at ordinary income rates, or
. to the extent that the gain does not exceed the excess, if any, of:
(1) the amount that would have been includible in the gross income of
the holder if its yield on the Regular Certificate were 110% of
the applicable Federal rate as of the date of purchase, over
(2) the amount of income actually includible in the gross income of
the holder with respect to the Regular Certificate.
In addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or loss
under Code Section 582(c). Long-term capital gains of certain noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income or short-term capital gains of the taxpayers (39.6%). Currently, the
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
112
Taxation of Owners of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of a holder of Residual Certificate, a residual
holder, and will not be taxed separately to the REMIC Pool. The daily portions
of REMIC taxable income or net loss of a residual holder are determined by
allocating the REMIC Pool's taxable income or net loss for each calendar
quarter ratably to each day in the quarter and by allocating the daily portion
among the residual holders in proportion to their respective holdings of
Residual Certificates in the REMIC Pool on that day. REMIC taxable income is
generally determined in the same manner as the taxable income of an individual
using the accrual method of accounting, except that:
. the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
. all bad loans will be deductible as business bad debts, and
. the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from
amortization of issue premium, if any, on the Regular Certificates, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that residual holders report their pro rata
share of taxable income or net loss of the REMIC Pool will continue until there
are no certificates of any class of the related series outstanding.
The taxable income recognized by a residual holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the mortgage loans, on the one hand,
and the timing of deductions for interest, including original issue discount,
or income from amortization of issue premium on the Regular Certificates, on
the other hand. In the event that an interest in the mortgage loans is acquired
by the REMIC Pool at a discount, and one or more of the mortgage loans is
prepaid, the residual holder may recognize taxable income without being
entitled to receive a corresponding amount of cash because:
. the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Certificates, and
. the discount on the mortgage loans which is includible in income may
exceed the deduction allowed upon distributions on those Regular
Certificates on account of any unaccrued original issue discount
relating to those Regular Certificates.
113
When there is more than one class of Regular Certificates that distribute
principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier classes of Regular Certificates to the extent that
the classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to this mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing classes of Regular Certificates are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of the a series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, whereas, to the extent the REMIC Pool consists
of fixed rate mortgage loans, interest income with respect to any given
mortgage loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, residual holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of the mismatching or unrelated deductions against which
to offset the income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of the
mismatching of income and deductions described in this paragraph, if present
with respect to a series of certificates, may have a significant adverse effect
upon a residual holder's after-tax rate of return.
A portion of the income of a residual certificateholder may be treated
unfavorably in three contexts:
. it may not be offset by current or net operating loss deductions;
. it will be considered unrelated business taxable income to tax-exempt
entities; and
. it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign residual
certificateholder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition,
a residual holder's taxable income during certain periods may exceed the income
reflected by the residual holders for the periods in accordance with generally
accepted accounting principles. Investors should consult their own accountants
concerning the accounting treatment of their investment in Residual
Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the residual holder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter, or time of disposition
of the Residual Certificate if earlier, determined without taking into account
the net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for the Residual Certificate. The
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the residual holder and will be decreased, but not below
zero, first, by a cash distribution from the REMIC Pool and, second, by the
amount of loss of the REMIC Pool reportable by the residual holder. Any loss
that is disallowed on account of this limitation may be carried over
indefinitely with respect to the residual holder as to whom the loss was
114
disallowed and may be used by the residual holder only to offset any income
generated by the same REMIC Pool.
A residual holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, the recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of
the Residual Certificates over their life. However, in view of the possible
acceleration of the income of residual holders described above under "--
Taxation of REMIC Income," the period of time over which the issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of this type of
residual interest as zero rather than the negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Internal Revenue Service may provide future
guidance on the proper tax treatment of payments made by a transferor of this
type of residual interest to induce the transferee to acquire the interest, and
residual holders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a residual holder,
other than an original holder, in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
residual holder will not recover a portion of this basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by the holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis
of mortgage loans to the REMIC Pool and "--Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense. Although it is
anticipated that the trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
mortgage loans and expenses with respect to the Regular Certificates, and
different methods could result in different timing or reporting of taxable
income or net loss to residual holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Certificates as described above under "--Taxation of Owners of Regular
Certificates--Original Issue Discount" and
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"--Taxation of Owners of Regular Certificates--Variable Rate Regular
Certificates," without regard to the de minimis rule described in that section,
and "--Taxation of Owners of Regular Certificates--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of mortgage loans if, in general, the basis of the REMIC Pool in the mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
the mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer to the REMIC Pool. The REMIC Regulations provide
that this basis is equal in the aggregate to the issue prices of all regular
and residual interests in the REMIC Pool. The accrued portion of the market
discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds its unpaid principal balances, the REMIC Pool will be considered to
have acquired the mortgage loans at a premium equal to the amount of the
excess. As stated above, the REMIC Pool's basis in mortgage loans is the fair
market value of the mortgage loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer to the REMIC Pool. In a manner analogous to the discussion above under
"--Taxation of Owners of Regular Certificates--Amortizable Premium," a person
that holds a mortgage loan as a capital asset under Code Section 1221 may elect
under Code Section 171 to amortize premium on mortgage loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the mortgage loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the mortgage loans are expected to be individuals, Code Section 171 will not
be available for premium on mortgage loans originated on or prior to September
27, 1985. Premium with respect to the mortgage loans may be deductible in
accordance with a reasonable method regularly employed by the holder. The
allocation of the premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that the premium should be allocated in a different manner, such as allocating
the premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income. All or a portion of the
REMIC taxable income includible in determining the federal income tax liability
of a residual holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for the quarterly period of:
. 120% of the long-term applicable Federal rate that would have applied to
the Residual Certificate, if it were a debt instrument, on the Startup
Day under Code Section 1274(d), multiplied by
. the adjusted issue price of the Residual Certificate at the beginning of
the quarterly period.
116
For this purpose, the adjusted issue price of a Residual Certificate at the
beginning of a quarter is the issue price of the Residual Certificate, plus the
amount of the daily accruals of REMIC income described in this paragraph for
all prior quarters, decreased by any distributions made with respect to the
Residual Certificate prior to the beginning of the quarterly period.
Accordingly, the portion of the REMIC Pool's taxable income that will be
treated as excess inclusions will be a larger portion of the income as the
adjusted issue price of the Residual Certificates diminishes.
The portion of a residual holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the residual holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the residual holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the residual holder's
excess inclusions will be treated as unrelated business taxable income of the
residual holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who
are not U.S. Persons and the portion attributable to excess inclusions is not
eligible for any reduction in the rate of withholding tax, by treaty or
otherwise. See "--Taxation of Certain Foreign Investors--Residual Certificates"
below. Finally, if a real estate investment trust or a regulated investment
company owns a Residual Certificate, a portion, allocated under Treasury
regulations yet to be issued, of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to certain persons who are not U.S. Persons. The SBJPA of 1996 has
eliminated the special rule permitting Section 593 thrift institutions to use
net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
residual holder.
. First, alternative minimum taxable income for a residual holder is
determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions.
. Second, a residual holder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year.
. Third, the amount of any alternative minimum tax net operating loss
deduction must be computed without regard to any excess inclusions.
These rules are effective for taxable years beginning after December 31, 1986,
unless a residual holder elects to have the rules apply only to taxable years
beginning after August 20, 1996.
117
Tax-Related Restrictions on Transfer of Residual Certificates. Disqualified
Organizations. If any legal or beneficial interest in a Residual Certificate is
transferred to a Disqualified Organization, a tax would be imposed in an amount
equal to the product of
. the present value of the total anticipated excess inclusions with
respect to the Residual Certificate for periods after the transfer and
. the highest marginal federal income tax rate applicable to
corporations.
The REMIC Regulations provide that the anticipated excess inclusions are based
on actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals the
applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. This rate is applied to the anticipated
excess inclusions from the end of the remaining calendar quarters in which they
arise to the date of the transfer. This type of tax generally would be imposed
on the transferor of the Residual Certificate, except that where the transfer
is through an agent, including a broker, nominee, or other middleman, for a
Disqualified Organization, the tax would instead be imposed on the agent.
However, a transferor of a Residual Certificate would in no event be liable for
this tax with respect to a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Certificate and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Certificate
is actually held by the Disqualified Organization.
In addition, if a Pass-Through Entity has excess inclusion income with
respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in the entity, then a
tax is imposed on the entity equal to the product of
. the amount of excess inclusions that are allocable to the interest in
the Pass-Through Entity during the period the interest is held by the
Disqualified Organization, and
. the highest marginal federal corporate income tax rate.
The tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
the tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification
number and, during the period the person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by section 860E(c) of
the Code. An exception to this tax, otherwise available
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to a Pass-Through Entity that is furnished certain affidavits by record holders
of interests in the entity and that does not know the affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement with respect to a series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless
. the proposed transferee furnished to the transferor and the trustee an
affidavit providing its taxpayer identification number and stating that
the transferee is the beneficial owner of the Residual Certificate and
is not a Disqualified Organization and is not purchasing the Residual
Certificate on behalf of a Disqualified Organization and
. the transferor provides a statement in writing to the trustee that it
has no actual knowledge that the affidavit is false.
Moreover, the pooling and servicing agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Certificate with respect to a series will bear a legend referring to the
restrictions on transfer, and each residual holder will be deemed to have
agreed, as a condition of ownership, to any amendments to the related pooling
and servicing agreement required under the Code or applicable Treasury
regulations to effectuate the above restrictions. Information necessary to
compute an applicable excise tax must be furnished to the Internal Revenue
Service and to the requesting party within 60 days of the request, and the
master servicer or the trustee may charge a fee for computing and providing the
information.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC
Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a residual holder, other than a residual holder who is not a U.S.
Person is disregarded for all federal income tax purposes if a significant
purpose of the transfer is to impede the assessment or collection of tax. A
residual interest in a REMIC, including a residual interest with a positive
value at issuance, is a "noneconomic residual interest" unless, at the time of
the transfer:
. the present value of the expected future distributions on the residual
interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate
in effect for the year in which the transfer occurs, and
. the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes on each excess inclusion.
The anticipated excess inclusions and the present value rate are determined
in the same manner as set forth above under "--Disqualified Organizations." The
REMIC Regulations
119
explain that a significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or
should have known that the transferee would be unwilling or unable to pay taxes
due on its share of the taxable income of the REMIC. A safe harbor is provided
if:
. the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and
found no significant evidence to indicate that the transferee would not
continue to pay its debts as they came due in the future, and
. the transferee represents to the transferor that it understands that, as
the holder of the non-economic residual interest, the transferee may
incur liabilities in excess of any cash flows generated by the interest
and that the transferee intends to pay taxes associated with holding the
residual interest as they become due.
The pooling and servicing agreement with respect to each series of
certificates will require the transferee of a Residual Certificate to certify
to the matters in the preceding sentence as part of the affidavit described
above under the heading "--Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a U.S. Person, unless the transferee's income
is effectively connected with the conduct of a trade or business within the
United States. A Residual Certificate is deemed to have tax avoidance potential
unless, at the time of the transfer:
. the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and
. the transferor reasonably expects that the transferee will receive
sufficient distributions from the REMIC Pool at or after the time at
which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to
be paid.
If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the certificates of a series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions under which the transfer may be made.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the residual holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis, as
described above under "--Basis and Losses" of the residual holder in the
Residual Certificate at the time of the sale or exchange. In addition
120
to reporting the taxable income of the REMIC Pool, a residual holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds the adjusted basis on that Distribution Date. The income will be
treated as gain from the sale or exchange of the residual holder's Residual
Certificate, in which case, if the residual holder has an adjusted basis in its
Residual Certificate remaining when its interest in the REMIC Pool terminates,
and if it holds the Residual Certificate as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of the
remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income:
. if a Residual Certificate is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that
would have accrued on the residual holder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal
rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to
any prior disposition of property that was held as a part of the
transaction or
. in the case of a non-corporate taxpayer, if the taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates.
In addition, gain or loss recognized from the sale of a Residual Certificate
by certain banks or thrift institutions will be treated as ordinary income or
loss under Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after the sale or disposition, acquires, or enters into any other
transaction that results in the application of Code Section 1091, any residual
interest in any REMIC or any interest in a "taxable mortgage pool" such as a
non-REMIC owner trust that is economically comparable to a Residual
Certificate.
Mark to Market Regulations. On December 24, 1996, the Internal Revenue
Service issued the Mark to Market Regulations. This mark-to-market requirement
applies to all securities of a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark to Market
Regulations provide that, for purposes of this mark to market requirement, a
Residual Certificate is not treated as a security and thus may not be marked to
market. The Mark to Market Regulations apply to all Residual Certificates
acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Income from certain transaction by the REMIC Pool,
called prohibited transactions, will not be part of the calculation of income
or loss includible in the
121
federal income tax returns of residual holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1)the disposition of qualified mortgages other than for
. substitution within two years of the Startup Day for a defective,
including a defaulted, obligation, or repurchase in lieu of
substitution of a defective, including a defaulted, obligation at
any time, or for any qualified mortgage within three months of the
Startup Day,
.foreclosure, default, or imminent default of a qualified mortgage,
.bankruptcy or insolvency of the REMIC Pool, or
.a qualified liquidation,
(2) the receipt of income from assets that are not the type of mortgages
or investments that the REMIC Pool is permitted to hold,
(3)the receipt of compensation for services, or
(4) the receipt of gain from disposition of cash flow investments other
than under a qualified liquidation.
Notwithstanding clauses (1) and (4), it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call, generally, an optional termination
to save administrative costs when no more than a small percentage of the
certificates is outstanding. The REMIC Regulations indicate that the
modification of a mortgage loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the mortgage loan, the waiver of a due-on-sale or due-on-
encumbrance clause, or the conversion of an interest rate by a mortgagor under
the terms of a convertible adjustable rate mortgage loan.
Contributions to the REMIC Pool After the Startup Day. In general, the REMIC
Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool
. during the three months following the Startup Day,
. made to a qualified reserve fund by a residual holder,
. in the nature of a guarantee,
. made to facilitate a qualified liquidation or clean-up call, and
. as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
Net Income from Foreclosure Property. The REMIC Pool will be subject of
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally,
122
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calender year after the
year in which the REMIC Pool acquired the property, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool. If a REMIC Pool adopts a plan of complete
liquidation, within the meaning of Code Section 860F(a)(4)(A)(i), which may be
accomplished by designating in the REMIC Pool's final tax return a date on
which the adoption is deemed to occur, and sells all of its assets, other than
cash, within a 90-day period beginning on that date, the REMIC Pool will not be
subject to the prohibited transaction rules on the sale of its assets, provided
that the REMIC Pool credits or distributes in liquidation all of the sale
proceeds plus its cash, other than amounts retained to meet claims, to holders
of Regular Certificates and residual holders within the 90-day period.
Administrative Matters. The REMIC Pool will be required to maintain its books
on a calendar year basis and to file federal income tax returns for federal
income tax purposes in a manner similar to a partnership. The form for the
income tax return is Form 1066, U.S. Real Estate Mortgage Investment Conduit
Income Tax Return. The trustee will be required to sign the REMIC Pool's
returns. Treasury regulations provide that, except where there is a single
residual holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or credit
in a unified administrative proceeding. The master servicer will be obligated
to act as "tax matters person," as defined in applicable Treasury regulations,
with respect to the REMIC Pool as agent of the residual holder holding the
largest percentage interest in the Residual Certificates. If the Code or
applicable Treasury regulations do not permit the master servicer to act as tax
matters person in its capacity as agent of the residual holder, the residual
holder or any other person specified under Treasury regulations will be
required to act as tax matters person. The tax matters person generally has
responsibility for overseeing and providing notice to the other residual
holders of certain administrative and judicial proceedings regarding the REMIC
Pool's tax affairs, although other holders of the Residual Certificates of the
same series would be able to participate in the proceedings in appropriate
circumstances.
Treasury regulations provide that a residual holder is not required to treat
items on its return consistently with their treatment on the REMIC Pool's
return if the holder owns 100% of the Residual Certificates for the entire
calendar year. Otherwise, each residual holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The Internal Revenue Service may assess a deficiency
resulting from a failure to comply
123
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. A REMIC Pool typically will not register as
a tax shelter under Code Section 6111 because it generally will not have a net
loss for any of the first five taxable years of its existence. Any person that
holds a Residual Certificate as a nominee for another person may be required to
furnish the related REMIC Pool, in a manner to be provided in Treasury
regulations, with the name and address of the person and other specified
information.
Limitations on Deduction of Certain Expenses. An investor who is an
individual, estate, or trust will be subject to limitation with respect to
certain itemized deductions described in Code Section 67, to the extent that
the itemized deductions, in the aggregate, do not exceed 2% of the investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer
will be reduced by the lesser of:
. 3% of the excess, if any, of adjusted gross income over $100,000,
$50,000 in the case of a married individual filing a separate return,
subject to annual adjustments for inflation after 1991 or
. 80% of the amount of itemized deductions otherwise allowable for that
year.
In the case of a REMIC Pool, the deduction may include deductions under Code
Section 212 for the servicing fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. The investors who
hold REMIC Certificates either directly or indirectly through certain pass-
through entities may have their pro rata share of the expenses allocated to
them as additional gross income, but may be subject to the limitation on
deductions. In addition, the expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause the investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Certificates
in the case of a REMIC Pool that would not qualify as a fixed investment trust
in the absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular
Certificate that is an individual, trust, estate, or pass-through entity also
will be allocated its pro rata share of the expenses and a corresponding amount
of income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable prospectus supplement, all the expenses will be allocable to the
Residual Certificates. In general, the allocable portion will be determined
based on the ratio that a REMIC Certificateholder's income, determined on a
daily basis, bears to the income of all holders of Regular Certificates and
Residual Certificates with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Certificates, either directly or indirectly
through a grantor trust, partnership, S corporation, REMIC, or certain other
pass-through entities described in the above mentioned temporary Treasury
regulations, may have taxable income in excess of the interest income at the
Pass-Through Rate on Regular Certificates that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates.
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Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to regular certificateholders who are non-resident aliens,
foreign corporations, or other Non-U.S. Persons generally will be considered
"portfolio interest" and, therefore, generally will not be subject to 30%
United States withholding tax, provided that
. the interest is not effectively connected with the conduct of a trade or
business in the United States of the certificateholder,
. the Non-U.S. Person is not a "10-percent shareholder" within the meaning
of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and
. the Non-U.S. Person provides the trustee, or the person who would
otherwise be required to withhold tax from the distributions under Code
Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Certificate
is a Non-U.S. Person.
If the statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated under an applicable tax
treaty or unless the interest on the Regular Certificate is effectively
connected with the conduct of a trade or business within the United States by
the Non-U.S. Person. In the latter case, the Non-U.S. Person will be subject to
United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Certificate.
The Internal Revenue Service recently issued the New Regulations, which will
be effective January 1, 2001. Current withholding certificates will remain
valid until the earlier of December 31, 2000 or the date of expiration of the
certificate under the rules as currently in effect. The New Regulations would
require, in the case of Regular Certificates held by a foreign partnership,
that
. the certification described above be provided by the partners rather
than by the foreign partnership and
. the partnership provide certain information, including a United States
taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to residual holders who are Non-U.S. Persons
generally should be treated as interest for purposes of the 30%, or lower
treaty rate, United States withholding tax. Treasury regulations provide that
amount distributed to residual holders may qualify as
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"portfolio interest," subject to the conditions described in "--Regular
Certificates" above, but only to the extent that
. the mortgage loans were issued after July 18, 1984 and
. the trust fund or its segregated pool of assets as to which a separate
REMIC election will be made, to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1).
Generally, mortgage loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
residual holders will not be entitled to any exemption from the 30% withholding
tax, or lower treaty rate, to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "--Taxation of Owners of
Residual Certificates--Limitations on Offset or Exemption of REMIC Income." If
the amounts paid to residual holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
the Non-U.S. Persons, 30%, or lower treaty rate, withholding will not apply.
Instead, the amounts paid to the Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30%, or lower treaty rate,
withholding is applicable, the amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed, or when the
Residual Certificate is disposed of, under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--
Taxation of Owners of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates--Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning Residual Certificates.
Backup Withholding. Distributions made on the Regular Certificates, and
proceeds from the sale of the Regular Certificates to or through certain
brokers, may be subject to a "backup" withholding tax under Code Section 3406
of 31% on "reportable payments", including interest distributions, original
issue discount, and, under certain circumstances, principal distributions,
unless the regular holder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the trustee, its agent or the broker who effected the sale of the Regular
Certificate, or the holder is otherwise an exempt recipient under applicable
provisions of the Code. Any amounts to be withheld from distribution on the
Regular Certificates would be refunded by the Internal Revenue Service or
allowed as a credit against the regular holder's federal income tax liability.
The New Regulations will change certain of the rules relating to certain
presumptions currently available relating to information reporting and backup
withholding. Non-U.S. Persons are urged to contact their own tax advisors
regarding the specific tax consequences to them of owning Residual
Certificates.
Reporting Requirements. Reports of accrued interest, original issue discount
and information necessary to compute the accrual of market discount will be
made annually to the Internal Revenue Service and to individuals, estates, non-
exempt and non-charitable trusts, and partnerships who are either holders of
record of Regular Certificates or beneficial
126
owners who own Regular Certificates through a broker or middleman as nominee.
All brokers, nominees and all other non-exempt holders of record of Regular
Certificates, including corporations, non-calendar year taxpayers, securities
or commodities dealers, real estate investment trusts, investment companies,
common trust funds, thrift institutions and charitable trusts, may request the
information for any calendar quarter by telephone or in writing by contacting
the person designated in Internal Revenue Service Publication 938 with respect
to a particular series of Regular Certificates. Holders through nominees must
request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to residual holders of REMIC Taxable Income or Net Loss
Allocation. Treasury regulations require that Schedule Q be furnished by the
REMIC Pool to each residual holder by the end of the month following the close
of each calendar quarter, 41 days after the end of a quarter under proposed
Treasury regulations, in which the REMIC Pool is in existence. Treasury
regulations require that, in addition to the above requirements, information
must be furnished quarterly to residual holders, furnished annually, if
applicable, to holders of Regular Certificates, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses allocable to the
holders. See "--Taxes that May Be Imposed on the REMIC Pool--Limitations on
Deduction of Certain Expenses" above. Furthermore, under these regulations,
information must be furnished quarterly to residual holders, furnished annually
to holders of Regular Certificates, and filed annually with the Internal
Revenue Service concerning the percentage of the REMIC Pool's assets meeting
the qualified asset tests described above under "--Characterization of
Investments in REMIC Certificates."
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Certificates, assuming
compliance with all provisions of the related pooling and servicing agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership, an
association taxable as a corporation, or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Certificate generally will be treated as the beneficial owner of an undivided
interest in the mortgage loans included in the Grantor Trust Fund.
Standard Certificates
General. Where there is no Retained Interest or "excess" servicing with
respect to the mortgage loans underlying the certificates of a series, and
where the certificates are not designated as Stripped Certificates, the holder
of each certificate in the series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the Grantor
Trust Fund represented by its Standard Certificate and will be considered the
beneficial owner of a pro rata undivided interest in each of the mortgage
loans, subject to the discussion below under "--Recharacterization of Servicing
Fees." Accordingly, the holder of a Standard Certificate of a particular series
will be required to report on its federal income
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tax return its pro rata share of the entire income from the mortgage loans
represented by its Standard Certificate, including interest at the coupon rate
on the mortgage loans, original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the master servicer, in
accordance with the certificateholder's method of accounting. A
certificateholder generally will be able to deduct its share of the servicing
fee and all administrative and other expenses of the trust fund in accordance
with its method of accounting, provided that the amounts are reasonable
compensation for services rendered to that Grantor Trust Fund. However,
investors who are individuals, estates or trusts who own certificates, either
directly or indirectly through certain pass-through entities, will be subject
to limitations with respect to certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for the servicing fee
and all the administrative and other expenses of the Grantor Trust Fund, to the
extent that the deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of:
. 3% of the excess, if any, of adjusted gross income over $100,000,
$50,000 in the case of a married individual filing a separate return, in
each case, as adjusted annually for inflation after 1991, or
. 80% of the amount of itemized deductions otherwise allowable for that
year.
As a result, the investors holding Standard Certificates, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on the Standard Certificates
with respect to interest at the Pass-Through Rate or as discount income on the
Standard Certificates. In addition, these expenses are not deductible at all
for purposes of computing the alternative minimum tax, and may cause the
investors to be subject to significant additional tax liability. Moreover,
where there is Retained Interest with respect to the mortgage loans underlying
a series of certificates or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "--Stripped Certificates" and "--Recharacterization of
Servicing Fees," respectively.
Holders of Standard Certificates, particularly any class of a series which is
a subordinate certificate, may incur losses of interest or principal with
respect to the mortgage loans. The losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular Certificates--
Treatment of Losses," except that certificateholders on the cash method of
accounting would not be required to report qualified stated interest as income
until actual receipt.
Tax Status. With respect to a series, Cadwalader, Wickersham & Taft has
advised the depositor that:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans. . . secured by an interest in real
property which is . . . residential real
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property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the mortgage loans represented by that
Standard Certificate is of the type described in that section of the Code.
2. A Standard Certificate owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on the assets
will be considered "interest on obligations secured by mortgages on real
property" to the extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation, including any participation or certificate of
beneficial ownership therein, which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph or whether the amount qualifying for that treatment must be
reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Loan as entirely secured by
real property if the fair market value of the real property securing the loan
exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, certificateholders are urged to consult
their own tax advisors concerning the effects of these arrangements on the
characterization of the certificateholder's investment for federal income tax
purposes.
Premium and Discount. Certificateholders are advised to consult with their
tax advisors as to the federal income tax treatment of premium and discount
arising either upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "--REMICs--
Taxation of Owners of Residual Certificates--Treatment of Certain Items of
REMIC Income and Expense--Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a certificateholder's interest in those
mortgage loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available with respect to mortgage
loans originated after September 27, 1985. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower
under applicable Code provisions or,
129
under certain circumstances, by the presence of "teaser" rates on the mortgage
loans. See "--Stripped Certificates" below regarding original issue discount on
Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to that income.
Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of the accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if the mortgage loans acquired
by a certificateholder are purchased at a price equal to the then unpaid
principal amount of the mortgage loans, no original issue discount attributable
to the difference between the issue price and the original principal amount of
the mortgage loans will be includible by the holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Certificates--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
mortgage loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable prospectus supplement, no prepayment assumption
will be assumed for purposes of the accrual.
Recharacterization of Servicing Fees. If the servicing fees paid to the
master servicer were deemed to exceed reasonable servicing compensation, the
amount of this excess would represent neither income nor a deduction to
certificateholders. In this regard, there are no authoritative guidelines for
federal income tax purposes as to either the maximum amount of servicing
compensation that may be considered reasonable in the context of this or
similar transactions or whether, in the case of Standard Certificates, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that the amount would exceed reasonable servicing compensation as to
some of the mortgage loans would be increased. Internal Revenue Service
guidance indicates that a servicing fee in excess of reasonable compensation
will cause the mortgage loans to be treated under the "stripped bond" rules.
The guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
the amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, if the
master servicer receives a servicing fee in excess of the amounts then it would
be viewed as retaining an ownership interest in a portion of the interest
payments on the mortgage loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive
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some or all of the principal payments on the obligation would result in
treatment of the mortgage loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "--Stripped Certificates,"
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Certificates, and the original issue discount rules of the Code would apply to
the holder of that certificate. While certificateholders would still be treated
as owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of the trust could be viewed as excluding the portion of
the mortgage loans the ownership of which is attributed to the master servicer,
or as including the portion as a second class of equitable interest. Applicable
Treasury regulations treat this arrangement as a fixed investment trust, since
the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, this recharacterization should not have any significant effect upon
the timing or amount of income reported by a certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See "--
Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates. Upon sale or exchange of a
Standard certificates, a Certificateholder will recognize gain or loss equal to
the difference between the amount realized on the sale and its aggregate
adjusted basis in the mortgage loans and other assets represented by the
certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Standard Certificate, exclusive of accrued
interest, increased by the amount of any income previously reported with
respect to the Standard Certificate and decreased by the amount of any losses
previously reported with respect to the Standard Certificate and the amount of
any distributions, other than accrued interest, received thereon. Except as
provided above with respect to market discount on any mortgage loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any gain or loss generally would be capital gain or loss if the
Standard Certificate was held as a capital asset. However, gain on the sale of
a Standard Certificate will be treated as ordinary income
. if a Standard Certificate is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that
would have accrued on the certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal
rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to
any prior disposition of property that was held as part of the
transaction or
. in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains
taxed as investment income at ordinary income rates.
Long-term capital gains of certain non-corporate taxpayers generally are
subject to a lower maximum tax rate (20%) than ordinary income or short-term
capital gains of the taxpayers
131
(39.6%). The maximum tax rate for corporations currently is the same with
respect to both ordinary income and capital gains.
Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, certificates that are subject to those rules will be referred to as
"Stripped Certificates." The certificates will be subject to those rules if:
. the depositor or any of its affiliates retains, for its own account or
for purposes of resale, in the form of Retained Interest or otherwise,
an ownership interest in a portion of the payments on the mortgage
loans,
. the depositor or any of its affiliates is treated as having an ownership
interest in the mortgage loans to the extent it is paid, or retains,
servicing compensation in an amount greater than reasonable
consideration for servicing the mortgage loans, and
. a class of certificates are issued in two or more classes representing
the right to non-pro-rata percentages of the interest and principal
payments on the mortgage loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on the mortgage loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
mortgage loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the master servicer, to the extent that the fees
represent reasonable compensation for services rendered. See the discussion
above under "--Standard Certificates--Recharacterization of Servicing Fees."
Although not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the classes of
Stripped Certificates in proportion to the distributions to the classes for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "--Standard Certificates--General," subject to the
limitations on deductions imposed by Code Sections 67 and 68 on an individual,
trust or estate that holds a Stripped Certificate directly or through a pass-
through entity.
Code Section 1286 treats a stripped bond or a stripped coupon generally as an
obligation issued at an original issue discount on the date that the stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in certain respects, particularly
where the Stripped Certificates are issued with respect to a mortgage pool
containing variable-rate mortgage loans, the depositor has been advised by
counsel that
. the Grantor Trust Fund will be treated as a grantor trust under subpart
E, part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and
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. each Stripped Certificate should be treated as a single installment
obligation for purposes of calculating original issue discount and gain
or loss on disposition.
This treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. Although it is possible
that computations with respect to Stripped Certificates could be made in one of
the ways described below under "--Taxation of Stripped Certificates--Possible
Alternative Characterization," the OID Regulations state, in general, that two
or more debt instruments issued by a single issuer to a single investor in a
single transaction should be treated as a single debt instrument. Accordingly,
for original issue discount purposes, all payments on any Stripped Certificates
should be aggregated and treated as though they were made on a single debt
instrument. The pooling and servicing agreement will require that the trustee
make and report all computations described below using this aggregate approach,
unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Certificate as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Certificate that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount, at a de minimis original issue discount, or,
presumably, at a premium. This treatment indicates that the interest component
of the Stripped Certificate would be treated as qualified stated interest under
the OID Regulations, assuming it is not an interest-only or super-premium
Stripped Certificate. Further, these regulations provide that the purchaser of
a Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either
. the initial discount with respect to the Stripped Certificate was
treated as zero under the de minimis rule, or
. no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans.
Any market discount would be reportable as described above under "--REMICs--
Taxation of Owners of Regular Certificates--Market Discount," without regard to
the de minimis rule therein, assuming that a prepayment assumption is employed
in the computation.
The holder of a Stripped Certificate will be treated as owning an interest in
each of the mortgage loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the mortgage
loans. Accordingly, an individual, trust or estate that holds a Stripped
Certificate directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Certificate, particularly any class of a series which
is a subordinate certificate, may deduct losses incurred with respect to the
Stripped Certificate as described above under "--Standard Certificates--
General."
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Status of Stripped Certificates. No specific legal authority exists as to
whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the mortgage loans. Although the issue is
not free from doubt, counsel has advised the depositor that Stripped
Certificates owned by applicable holders should be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(4)(A),
"obligation[s].. principally secured by an interest in real property which is...
residential real estate'' within the meaning of Code Section 860G(a)(3)(A), and
""loans.... secured by an interest in real property'' within the meaning of Code
Section 7701(a)(19)(C)(v), and interest, including original issue discount,
income attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the mortgage
loans and interest on the mortgage loans qualify for that treatment. The
application of these Code provisions to Buydown Loans is uncertain. See "--
Standard Certificates--Tax Status" above.
Taxation of Stripped Certificates. Original Issue Discount. Except as
described above under "--General," each Stripped Certificate will be considered
to have been issued at an original issue discount for federal income tax
purposes. Original issue discount with respect to a Stripped Certificate must
be included in ordinary income as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, which may be
prior to the receipt of the cash attributable to the income. Based in part on
the issue discount required to be included in the income of a holder of a
Stripped Certificate, in any taxable year likely will be computed generally as
described above under "--REMICs--Taxation of Owners of Regular Certificates--
Original Issue Discount" and "REMICs--Taxation of Owners of Regular
Certificates--Variable Rate Regular Certificates." However, with the apparent
exception of a Stripped Certificate qualifying as a market discount obligation
as described above under "--General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder, and the stated redemption price
at maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to the certificateholder, presumably under the Prepayment
Assumption, other than qualified stated interest.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a certificateholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of the
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by the certificateholder's Stripped Certificate. While the matter is not free
from doubt, the holder of a Stripped Certificate should be entitled in the year
that it becomes certain, assuming no further prepayments, that the holder will
not recover a portion of its adjusted basis in the Stripped Certificate to
recognize a loss, which may be a capital loss, equal to the portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some or all of
the interest payments with respect to the Stripped Certificates will not be
made if the mortgage loans are prepaid could lead to the interpretation that
the interest payments are "contingent" within
134
the meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to
prepayable securities such as the Stripped Certificates. However, if final
regulations dealing with contingent interest with respect to the Stripped
Certificates apply the same principles as the OID Regulations, these
regulations may lead to different timing of income inclusion that would be the
case under the OID Regulations. Furthermore, application of these principles
could lead to the characterization of gain on the sale of contingent interest
Stripped Certificates as ordinary income. Investors should consult their tax
advisors regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the certificateholder's
adjusted basis in the Stripped Certificate, as described above under "REMICs--
Taxation of Owners of Regular Certificates--Sale or Exchange of Regular
Certificates." Gain or loss from the sale or exchange of a Stripped Certificate
generally will be capital gain or loss to the certificateholder if the Stripped
Certificate is held as a "capital asset" within the meaning of Code Section
1221, and will be long-term or short-term depending on whether the Stripped
Certificate has been held for the long-term capital gain holding period,
currently, more than one year. To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped
Certificates, the subsequent purchaser will be required for federal income tax
purposes to accrue and report the excess as if it were original issue discount
in the manner described above. It is not clear for this purpose whether the
assumed prepayment rate that is to be used in the case of a Certificateholder
other than an original Certificateholder should be the Prepayment Assumption or
a new rate based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes the classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the Stripped
Certificates discussed above are not the only possible interpretations of the
applicable Code provisions. For example, the Certificateholder may be treated
as the owner of:
. one installment obligation consisting of the Stripped Certificate's pro
rata share of the payments attributable to principal on each mortgage
loan and a second installment obligation consisting of the Stripped
Certificate's pro rata share of the payments attributable to interest on
each mortgage loan,
. as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan, or
. a separate installment obligation for each mortgage loan, representing
the Stripped Certificate's pro rata share of payments of principal
and/or interest to be made with respect thereto.
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Alternatively, the holder of one or more classes of Stripped Certificates may
be treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that the Stripped Certificate, or classes of
Stripped Certificates in the aggregate, represent the same pro rata portion of
principal and interest on each the mortgage loan, and a stripped bond or
stripped coupon, treated as an installment obligation or contingent payment
obligation, as to the remainder. Treasury regulations regarding original issue
discount on stripped obligations make the above interpretations less likely to
be applicable. The preamble to these regulations states that they are premised
on the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, certificateholders
are urged to consult their own tax advisors regarding the proper treatment of
Stripped Certificates for federal income tax purposes.
Reporting Requirements and Backup Withholding
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each certificateholder at any time during that year, the
information, prepared on the basis described above, as is necessary to enable
the certificateholder to prepare its federal income tax returns. This
information will include the amount of original issue discount accrued on
certificates held by persons other than certificateholders exempted from the
reporting requirements. However, the amount required to be reported by the
trustee may not be equal to the proper amount of original issue discount
required to be reported as taxable income by a certificateholder, other than an
original certificateholder that purchased at the issue price. In particular, in
the case of Stripped Certificates, unless provided otherwise in the applicable
prospectus supplement, the reporting will be based upon a representative
initial offering price of each class of Stripped Certificates. The trustee will
also file the original issue discount information with the Internal Revenue
Service. If a certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
certificateholder has not reported all interest and dividend income required to
be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under "--
REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a certificate evidences ownership in mortgage loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or a lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the certificateholder on the sale or exchange of this
type of certificate also will be subject to federal income tax at the same
rate.
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Treasury regulations provide that interest or original issue discount paid by
the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and the persons will be
subject to the same certification requirements, described above under "--
REMICs--Taxation of Certain Foreign Investors--Regular Certificates."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described above in
"Federal Income Tax Consequences," potential investors should consider the
state, local and other tax consequences relating to the acquisition, ownership
and disposition of the certificates. State, local and other income tax law may
differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the tax laws other than federal
income tax law. Therefore, potential investors should consult their tax
advisors with respect to the state, local and other tax consequences to them
arising from an investment in the certificates.
ERISA CONSIDERATIONS
General
ERISA and Section 4975 of the Code impose certain requirements on those
employee benefit plans and arrangements to which they apply and on those
persons who are fiduciaries with respect to the employee benefit plans and
arrangements. The following is a general discussion of the requirements, and
certain applicable exceptions to and administrative exemptions from the
requirements. For purposes of this discussion, an IRA is an ERISA Plan if the
IRA is endorsed by or contributed to by the IRA participant's employer or
employee organization. Other IRAs and Non-ERISA Plans are not considered ERISA
Plans, but the Non-ERISA Plans are subject to ERISA-like requirements as well
as the prohibited transaction provisions of the Code. Exempt Plans are exempt
from the provisions of Title I of ERISA and the prohibited transaction
provisions of the Code. Accordingly, Exempt Plans also are not considered ERISA
Plans, but the Exempt Plans may be subject to the provisions and special
requirements of other applicable federal, state and local law.
Before purchasing any certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to the
purchase under the requirements of ERISA or the Code, whether prohibited
transaction exemptions such as PTE 83-1 or any individual administrative
exemption applies, including whether the appropriate conditions set forth
therein would be met, or whether any statutory prohibited transaction exemption
is applicable, and further should consult the applicable prospectus supplement
relating to the series of certificates.
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Certain Requirements Under ERISA and the Code
General
In accordance with ERISA's general fiduciary standards, before investing in a
certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for the
ERISA Plan in view of its overall investment policy and the composition and
diversification of its portfolio. An ERISA Plan fiduciary should especially
consider the ERISA requirement of investment prudence and the sensitivity of
the return on the certificates to the rate of principal repayments, including
prepayments, on the mortgage loans, as discussed in "Yield and Prepayment
Considerations" herein.
Parties in Interest/Disqualified Persons
Other provisions of ERISA, and corresponding provisions of the Code, prohibit
certain transactions involving the assets of an ERISA Plan and persons who have
certain specified relationships to the ERISA Plan, so-called "parties in
interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code. The depositor, the master servicer or the trustee or
certain affiliates of these parties might be considered or might become
"parties in interest" or "disqualified persons" with respect to an ERISA Plan.
If so, the acquisition or holding of certificates by or on behalf of the ERISA
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an administrative exemption described
below or some other exemption is available.
Special caution should be exercised before the assets of an ERISA Plan,
including assets that may be held in an insurance company's separate or general
accounts where assets in the accounts may be deemed plan assets for purposes of
ERISA, are used to purchase a certificate if, with respect to these assets, the
depositor, the master servicer or the trustee or an affiliate of these parties
either:
. has investment discretion with respect to the investment of the assets
of the ERISA Plan; or
. has authority or responsibility to give, or regularly gives, investment
advice with respect to the assets for a fee and under an agreement or
understanding that the advice will serve as a primary basis for
investment decisions with respect to the assets and that the advice will
be based on the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a trust fund were deemed to constitute
assets of an ERISA Plan, it is possible that an ERISA Plan's investment in the
certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage plan assets by the fiduciary deciding to invest in the
certificates, and certain transactions involved in the operation of the trust
estate might be deemed to constitute prohibited transactions under ERISA and
the Code. Neither ERISA nor the Code define the term "plan assets."
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The U.S. Department of Labor has issued regulations concerning whether or not
an ERISA Plan's assets would be deemed to include an interest in the underlying
assets of an entity, such as a Trust Estate, for purposes of the reporting and
disclosure and general fiduciary responsibility provisions of ERISA, as well as
for the prohibited transaction provisions of ERISA and the Code, if the ERISA
Plan acquires an "equity interest", such as a Certificate, in this type entity.
Certain exceptions are provided in the Department of Labor regulations
whereby an investing ERISA Plan's assets would be deemed merely to include its
interest in the certificates instead of being deemed to include an interest in
the assets of a trust fund. However, it cannot be predicted in advance nor can
there be any continuing assurance whether the exceptions may be met, because of
the factual nature of certain of the rules set forth in the regulations. For
example, one of the exceptions in the regulations states that the underlying
assets of an entity will not be considered "plan assets" if less than 25% of
the value of all classes of equity interests are held by "benefit plan
investors," which term is defined to include ERISA Plans, Non-ERISA Plans and
Exempt Plans and any entity whose assets include "plan assets" by reason of
benefit plan investments in the entity, but this exception is tested
immediately after each acquisition of an equity interest in the entity whether
upon initial issuance or in the secondary market.
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions of
the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies
to Non-ERISA Plans as well as ERISA Plans. However, the administrative
exemptions discussed below are not applicable to Non-ERISA Plans.
Administrative Exemptions
Individual Administrative Exemptions.
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative prohibited transaction exemptions which are
in some respects broader than Prohibited Transaction Class Exemption 83-1. The
exemptions can only apply to mortgage-backed securities which, among other
conditions, are sold in an offering with respect to which the underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If this type of exemption might be applicable to a series of
certificates, the applicable prospectus supplement will refer to the
possibility.
Among the conditions that must be satisfied for an exemption to apply are the
following:
(1) The acquisition of certificates by an ERISA Plan is on terms,
including the price for the certificates, that are at least as
favorable to the ERISA Plan as they would be in an arm's length
transaction with an unrelated party.
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(2) The rights and interests evidenced by certificates acquired by the
ERISA Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust fund.
(3) The certificates acquired by the ERISA Plan have received a rating at
the time of the acquisition that is one of the three highest generic
rating categories from either S&P, Moody's, DCR and Fitch.
(4) The trustee must not be an affiliate of any other member of the
Restricted Group.
(5) The sum of all payments made to and retained by the underwriter in
connection with the distribution of certificates represents not more
than reasonable compensation for underwriting the certificates. The
sum of all payments made to and retained by the depositor under the
assignment of the mortgage loans to the trust fund represents not more
than the fair market value of the mortgage loans. The sum of all
payments made to and retained by the master servicer, and any other
servicer, represents not more than reasonable compensation for the
person's services under the pooling and servicing agreement and
reimbursement of the person's reasonable expenses in connection
therewith.
(6) The ERISA Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D under the
Securities Act.
The trust fund must also meet the following requirements:
. the assets of the trust fund must consist solely of assets of the type
that have been included in other investment pools in the marketplace;
. certificates in other investment pools must have been rated in one of
the three highest rating categories of S&P, Moody's, Fitch or DCR for
at least one year prior to the ERISA Plan's acquisition of the
certificates; and
. certificates evidencing interests in other investment pools must have
been purchased by investors other than ERISA Plans for at least one
year prior to any ERISA Plan's acquisition of the certificates.
If the conditions to an exemption are met, whether or not an ERISA Plan's
assets would be deemed to include an ownership interest in the mortgage loans
in a mortgage pool, the acquisition, holding and resale of the certificates by
ERISA Plans would be exempt from certain of the prohibited transaction
provisions of ERISA and the Code.
Moreover, an exemption can provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur if an ERISA Plan fiduciary
causes an ERISA Plan to acquire and hold certificates in a trust fund in which
the fiduciary, or its affiliate, is an obligor on the mortgage loans held in
the trust estate provided that, among other requirements:
. in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in
which ERISA Plans have invested is acquired by persons independent of
the Restricted Group, and at
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least fifty percent of the aggregate interest in the trust fund is
acquired by persons independent of the Restricted Group;
. the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the mortgage loans contained
in the trust fund;
. the ERISA Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding
at the time of the acquisition and
. immediately after the acquisition no more than twenty-five percent of
the assets of the ERISA Plan with respect to which the person is a
fiduciary are invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The administrative exemption discussed above does not apply to the Restricted
Group.
PTE 83-1
PTE 83-1 permits certain transactions involving the creation, maintenance and
termination of certain residential mortgage pools and the acquisition and
holding of certain residential mortgage pool pass-through certificates by ERISA
Plans, whether or not the ERISA Plan's assets would be deemed to include an
ownership interest in the mortgages in the mortgage pools, and whether or not
the transactions would otherwise be prohibited under ERISA or the Code.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of this type of certificate to pass-
through payment of principal and interest from the pooled mortgage loans, less
any fees retained by the pool sponsor." It appears that, for purposes of PTE
83-1, the term "mortgage pool pass-through certificate" would include
certificates issued in a single class or in multiple classes that evidence the
beneficial ownership of both a specified percentage of future interest
payments, after permitted deductions, and a specified percentage of future
principal payments on a trust fund.
However, it appears that PTE 83-1 does or might not apply to the purchase and
holding of:
. certificates that evidence the beneficial ownership only of a specified
percentage of future interest payments, after permitted deductions, on a
trust fund or only of a specified percentage of future principal
payments on a trust fund,
. Residual Certificates,
. certificates evidencing ownership interests in a trust fund which
includes mortgage loans secured by multifamily residential properties or
shares issued by cooperative housing corporations, or
. certificates which are subordinated to other classes of certificates of
a series.
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Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans should
not purchase any certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption:
(1) the maintenance of a system of insurance or other protection for the
pooled mortgage loans or the property securing the loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments;
(2) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
(3) a requirement that the sum of all payments made to and retained by the
pool sponsor, and all funds inuring to the benefit of the pool sponsor
as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor
to the pool.
The system of insurance or protection referred to in clause (1) above must
provide the protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1, and a predecessor exemption,
the U.S. Department of Labor did not have under its consideration interests in
pools of the exact nature as some of the certificates described herein.
Non-ERISA Plans and Exempt Plans
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans for
purposes of the above discussion, Non-ERISA Plans are subject to the prohibited
transaction provisions of the Code, and both Non-ERISA Plans and Exempt Plans
may be subject to certain other ERISA-like requirements of applicable law.
Therefore, before purchasing any certificates by or on behalf of a Non-ERISA
Plan or any Exempt Plan, the prospective purchaser should exercise special
caution and should consult with its legal counsel concerning the propriety and
implications of the investment under the Code or other applicable law.
Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by an IRA or any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of Benefit Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511 through 515 and
860E. Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt
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entities not subject to Code Section 511 such as certain governmental plans, as
discussed above under the caption "Federal Income Tax Consequences--REMICs--
Taxation of Owners of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates--Disqualified Organizations." In addition,
prior to the transfer of a Residual Certificate, the trustee or the depositor
may require an opinion of counsel to the effect that the transferee is not a
Disqualified Organization and that the transfer will not subject the trustee,
the depositor, the master servicer or any servicer to additional obligations
imposed by ERISA or the Code.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that
potential investors who are acting on behalf of a Benefit Plan or any other
employee benefit plan or arrangement consult with their counsel regarding the
consequences under ERISA, the Code or other applicable law of their acquisition
and ownership of certificates.
The sale of certificates to a Benefit Plan or any other employee benefit plan
or arrangement is in no respect a representation by the depositor or the
applicable underwriter that this investment meets all relevant legal
requirements with respect to investments by employee benefit plans generally or
any particular plan or arrangement, or that this investment is appropriate for
employee benefit plans generally or any particular plan or arrangement.
LEGAL INVESTMENT
The related prospectus supplement will specify which classes of the
certificates of a series, if any, will constitute "mortgage related securities"
for purposes of the SMMEA. Generally, the only classes of certificates that
will be "mortgage related securities" for purposes of SMMEA are those that:
. are rated in one of the two highest rating categories by one or more
rating agencies and
. are part of a series representing interests in a trust fund consisting
of mortgage loans originated by certain types of originators specified
in SMMEA and secured by first liens on real estate.
As "mortgage related securities," these classes will constitute legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities, including, but not limited to,
depository institutions, insurance companies and pension funds, created under
or existing under the laws of the United States or of any state, including the
District of Columbia and Puerto Rico, whose authorized investments are subject
to state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality of the United States constitute legal investments
for these entities. Pursuant to SMMEA, a number of states enacted legislation,
on or before the October 3, 1991 cut-off for the enactments, limiting to
varying extents the ability of certain entities, in particular, insurance
companies, to invest in "mortgage related securities," in most cases by
requiring the affected investors to rely
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solely upon existing state law, and not SMMEA. Accordingly, the investors
affected by the legislation will be authorized to invest in the certificates
only to the extent provided in the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in these type of
securities, and national banks may purchase these type of securities for their
own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. (S)24 (Seventh), subject in each
case to the regulations as the applicable federal regulatory authority may
prescribe. In this connection, the OCC has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus, but subject to
compliance with certain general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. (S)1.5, certain "Type IV
securities," defined in 12 C.F.R. (S)1.2(l) to include certain "residential
mortgage related securities." As so defined, "residential mortgage-related
security" means, in relevant part, "mortgage related security" within the
meaning of SMMEA. The NCUA has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. (S)703.140. The OTS has issued Thrift Bulletin 13a
(December 1, 1998) "Management of Interest Rate Risk, Investment Securities,
and Derivative Activities," which thrift institutions subject to the
jurisdiction of the OTS should consider before investing in any of the
certificates.
All depository institutions considering an investment in the certificates
should review the 1998 Policy Statement of FFIEC, which has been adopted by the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the OTS, effective May 26, 1998, and by the NCUA,
effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
applicable to all securities, including mortgage pass-through securities and
mortgage-derivative products, used for investment purposes.
Institutions whose investment activities are subject to regulation by federal
or state authorities should review rules, policies and guidelines adopted from
time to time by these authorities before purchasing any certificates, as
certain series or classes, in particular, certificates which are entitled
solely or disproportionately to distributions of principal or interest, may be
deemed unsuitable investments, or may otherwise be restricted, under the rules,
policies or guidelines, in certain instances irrespective of SMMEA.
The statements above do not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-
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of-assets limits provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying," and with regard
to any certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain classes of certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the certificates for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase certificates under applicable legal investment
restrictions. The uncertainties described above, and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the certificates, may adversely affect the liquidity of the
certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the certificates of any class constitute
legal investments for them or are subject to investment, capital or other
restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to the investor.
METHOD OF DISTRIBUTION
The certificates offered hereby and by the prospectus supplements will be
offered in series. The distribution of the certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
prospectus supplement, the certificates will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by First Union Securities, Inc., acting as underwriter
with other underwriters, if any, named therein. In this event, the prospectus
supplement may also specify that the underwriters will not be obligated to pay
for any certificates agreed to be purchased by purchasers under purchase
agreements acceptable to the depositor. In connection with the sale of the
certificates, underwriters may receive compensation from the depositor or from
purchasers of the certificates in the form of discounts, concessions or
commissions. The prospectus supplement will describe any compensation paid by
the depositor.
Alternatively, the prospectus supplement may specify that the certificates
will be distributed by First Union Securities, Inc., acting as agent or in some
cases as principal with respect to certificates that it has previously
purchased or agreed to purchase. If First Union Securities, Inc. acts as agent
in the sale of certificates, it will receive a selling commission with respect
to each series of certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the certificates sold
hereunder as of the cut-off date. The exact percentage for each series of
certificates will be disclosed in the related prospectus supplement. To the
extent that First Union Securities, Inc. elects to purchase certificates as
principal, First Union Securities, Inc. may realize losses or profits based
upon
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the difference between its purchase price and the sales price. The prospectus
supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of the offering and any
agreements to be entered into between the depositor and purchasers of
certificates of the series.
The depositor will indemnify First Union Securities, Inc. and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act, or will contribute to payments First Union Securities, Inc. and
any underwriters may be required to make for these liabilities.
In the ordinary course of business, First Union Securities, Inc. and the
depositor may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the depositor's
mortgage loans pending the sale of the mortgage loans or interests therein,
including the certificates.
The depositor anticipates that the certificates will be sold primarily to
institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of certificates. Holders of certificates should
consult with their legal advisors in this regard prior to any reoffer or sale.
Underwriters or agents and their associates may be customers of, including
borrowers from, engage in transactions with and/or perform services for
affiliates of the depositor, including First Union National Bank and HFC and
the trustee in the ordinary course of business.
LEGAL MATTERS
Certain legal matters relating to the certificates, including certain federal
income tax consequences with respect thereto, will be passed upon for the
depositor by Cadwalader, Wickersham & Taft, New York.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of certificates
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
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RATING
It is a condition to the issuance of the certificates of each series offered
by this prospectus and by the prospectus supplement that they shall have been
rated in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related prospectus
supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with the certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which the
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
REPORTS TO CERTIFICATEHOLDERS
The master servicer or trustee will forward to the certificateholders of each
series, the Monthly Report as described in this prospectus and in the
applicable prospectus supplement for the series. No information contained in
the Monthly Reports will have been examined or reported upon by an independent
public accountant. See "Description of the Certificates--Reports to
Certificateholders."
The depositor will file or cause to be filed with the SEC the periodic
reports with respect to each trust fund as are required under the Exchange Act,
and the rules and regulations of the SEC, as interpreted by the staff of the
SEC thereunder. The depositor does not intend to file periodic reports under
the Exchange Act following the expiration of the reporting period prescribed by
Rule 15d-1 of Regulation 15D under the Exchange Act.
WHERE YOU CAN FIND MORE INFORMATION
The depositor filed a registration statement relating to the certificates
with the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the SEC, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the SEC offices, 450
Fifth Street N.W., Washington, D.C. 20549 or at the regional offices of the SEC
located at Suite 1300, 7 World Trade Center, New York, New York 10048 and Suite
1400, Citicorp Center, 500 West Madison Street,
147
Chicago, Illinois 60661-2511. The SEC also maintains a site on the World Wide
Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements and other information field
electronically through EDGAR. The depositor has filed the registration
statement, including all exhibits, through the EDGAR system and therefore the
materials should be available by logging onto the SEC's Web site. The SEC
maintains computer terminals providing access to the EDGAR system at each of
the offices referred to above. Copies of any documents incorporated to this
prospectus by reference will be provided to each person to whom a prospectus is
delivered upon written or oral request directed to the depositor at JV Capital
Trust, c/o Wilmington Trust Company, 1100 North Market Street, Rodney Square
North, Wilmington, DE 19890, Attention: Corporate Trust Administration,
telephone number (302) 651-1000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the depositor to "incorporate by reference" information it
files with the SEC, which means that the depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The depositor
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the trust fund until the termination of the offering
of the certificates.
As a recipient of this prospectus, you may request a copy of any document the
depositor incorporates by reference, except exhibits to the documents unless
the exhibits are specifically incorporated by reference, at no cost, by writing
or calling the depositor at JV Capital Trust, c/o Wilmington Trust Company,
1100 North Market Street, Rodney Square North, Wilmington, DE 19890, Attention:
Corporate Trust Administration, telephone number (302) 651-1000.
148
GLOSSARY OF TERMS
"1986 Act" means the Tax Reform Act of 1986.
"1998 Policy Statement" means the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities."
"Accrual Certificates" means a class of certificates that provides for
interest that accrues, but is not currently payable.
"Advance" is an amount equal to the aggregate of payments of principal and
interest, or, in the case of revolving home equity loans, payments of interest
only, that were delinquent on a specific date, in each case, net of applicable
servicing compensation.
"Asset Conservation Act" means the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996.
"Available Distribution Amount" for each Distribution Date will equal the sum
of the following amounts:
(1) the aggregate of all previously undistributed payments on account of
principal, including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related prospectus supplement and
interest on the mortgage loans in the related trust fund; including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under
Letters of Credit or other credit enhancement instruments as permitted
thereunder and as specified in the related pooling and servicing
agreement; received by the master servicer after the cut-off date and
on or prior to the day of the month of the related Determination Date
except:
. all payments that were due on or before the cut-off date;
. all Liquidation Proceeds and all Insurance Proceeds, all Principal
Prepayments, all amounts deposited in the Collection Account by the
depositor in connection with a substitution of a mortgage loan and
all other proceeds of any mortgage loan purchased by the depositor
under the pooling and servicing agreement that were received after
the prepayment period specified in the related prospectus supplement
and all related payments of interest representing interest for any
period after the prepayment period;
. all scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of distribution;
. amounts received on particular mortgage loans as late payments of
principal or interest or other amounts required to be paid by
mortgagors, but only to the extent of any unreimbursed advance made
by the master servicer;
. amounts representing reimbursement, to the extent permitted by the
pooling and servicing agreement and as described under "--Advances",
for Advances made by the master servicer that were deposited into
the Collection Account,
149
amounts representing reimbursement for certain other losses and
expenses incurred by the master servicer or the depositor and
described below; and
. that portion of each collection of interest on a particular mortgage
loan in the trust fund that represents credit enhancement fees or
servicing compensation payable to the master servicer or Retained
Interest that is to be retained from the collection or is permitted
to be retained from related Insurance Proceeds, Liquidation Proceeds
or proceeds of mortgage loans purchased under the pooling and
servicing agreement;
(2) the amount of any Advance made by the master servicer as described
under "--Advances" and deposited by it in the Collection Account; and
(3) if applicable, amounts withdrawn from a Reserve Fund.
"Balloon Loan" means a mortgage loan which has a term to maturity that is
shorter than its amortization which causes the outstanding principal balance of
the related mortgage loan to be due and payable at the end of a certain
specified period.
"Bankruptcy Code" means the United States Bankruptcy Code, 11 U.S.C. Sections
101 et seq.
"Belgium Cooperative" means Euroclear Clearance Systems S.C., a Belgian
cooperative corporation.
"Benefit Plans" means, collectively, Exempt Plans, ERISA Plans and Non-ERISA
Plans.
"Buydown Loans" are mortgage loans which include provisions whereby a third
party partially subsidizes the borrower's monthly payments during the early
years of the mortgage loan with the difference being made up from a Buydown
Fund.
"Buydown Fund" is a fund, contributed by a third party at the time of
origination of a Buydown Loan, which is created to make up for low borrower
monthly payments during the early years of a Buydown Loan.
"Cash Flow Agreement" means any of the following:
. guaranteed investment contracts under which moneys held in the funds and
accounts established for the related series will be invested at a
specified rate,
. interest rate exchange agreements,
. interest rate cap or floor agreements,
. currency exchange agreements, or
. similar agreements provided to reduce the effects of interest rate or
currency exchange rate fluctuations on the assets or on one or more
classes of certificates.
Currency exchange agreements might be included in the trust fund if some or all
of the mortgage loans were denominated in a non-United States currency.
150
"Certificate Balance" of any class of certificates entitled to distributions
of principal will be the aggregate original Certificate Balance of the class of
certificates specified in the prospectus supplement, reduced by all
distributions reported to the holders of the certificates as allocable to
principal and
(1) in the case of Accrual Certificates increased by all interest accrued
but not then distributable on the Accrual Certificates and
(2) in the case of adjustable rate certificates, if so specified in the
related prospectus supplement, subject to the effect of negative
amortization or any other amount as is specified in the related
prospectus supplement.
"Certificate Register" means the register maintained for holders of
certificates.
"CEDEL" means Cedel Bank, societe anonyme.
"CERCLA" means the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Value" means, unless otherwise specified in the related
prospectus supplement, the lesser of:
(a)the value of the related Mortgaged Property, based upon:
. the appraised value, if any,
. drive-by evaluation made at the time of origination of the mortgage
loan, or
. a statistical evaluation which is an appraisal that uses a
statistical model to estimate the value of the Mortgaged Property,
and
(b) the purchase price of the Mortgaged Property if the mortgage loan
proceeds were used to purchase the Mortgaged Property.
"Collection Account" means the separate account or accounts for the
collection of payments on the related mortgage assets in the trust fund.
"Cooperative Loans" means cooperative apartment loans secured by security
interests in shares issued by Cooperatives.
"Cooperatives" means private, non-profit, cooperative housing corporations.
"Covered Trust" means a series of certificates covered by some form of credit
enhancement.
"Credit Score" is a statistical credit bureau score designed to assess a
borrower's creditworthiness and likelihood of default on a consumer obligation
over a two-year period. Credit Scores were not developed to predict the
likelihood of default on mortgage loans and, accordingly, may not be indicative
of the ability of a mortgagor to repay its mortgage loan. Credit Scores
generally range from approximately 400 to approximately 800, with a higher
score indicating an individual with a more favorable credit history than an
individual with a lower score.
"DCR" means Duff & Phelps Credit Rating Co.
151
"Debt Ratio" means debt service-to-income ratio.
"Disqualified Organization" means the United States, any state or political
subdivision of the United States, any foreign government, any international
organization, any agency or instrumentality of any of the entities mentioned
above; provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors in
not selected by any governmental entity; any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization, other
than a farmers' cooperative described in Code Section 531, that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
"EDGAR" means the Electronic Data Gathering, Analysis and Retrieval system.
"Eligible Investments" means United States government securities, other high-
quality investments or other investments that are acceptable to each rating
agency.
"ERISA Plans" means employee benefit plans and arrangements to which both
ERISA and the Code apply.
"Euroclear" means the Euroclear System.
"Euroclear Operator" means Morgan Guaranty Trust Company of New York.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Plans" means employee benefit plans that are governmental plans, as
defined in Section 3(32) of ERISA, and certain church plans, as defined in
Section 3(33) of ERISA.
"FASIT" means a financial asset securitization investment trust.
"FFIEC" means the Federal Financial Institutions Examination Council.
"Financial Intermediary" means a brokerage firm, bank, thrift institution or
other financial intermediary.
"FHA" means the Federal Housing Administration.
"FHA Insurance" means insurance provided by the FHA as authorized under the
United States Housing Act of 1937, as amended.
"Fitch" means Fitch IBCA, Inc.
"Garn-St Germain Act" means the Garn-St Germain Depository Institutions Act
of 1982.
"Grantor Trust Certificates" are securities representing interests in a
Grantor Trust Fund.
152
"Grantor Trust Fund" is a trust fund as to which no REMIC election is made.
"HFC" means Household Finance Corporation, as master servicer.
"Home Ownership Act" means the Home Ownership and Equity Protection Act of
1994.
"HUD" means the Department of Housing and Urban Development.
"Insurance Proceeds" means all proceeds; net of unreimbursed payments of
property taxes, insurance premiums and similar items incurred, and unreimbursed
advances made, if any, by the master servicer; of the hazard insurance policies
and any Primary Mortgage Insurance Policies, to the extent the proceeds are not
applied to the restoration of the property or released to the mortgagor in
accordance with the master servicer's normal servicing procedures.
"JVMC" means JV Mortgage Capital, L.P., a Delaware limited partnership.
"JVMC Portfolio" means the residential mortgage loans acquired by JVMC and
serviced by HFC.
"Letter of Credit" means a letter of credit issued by the bank or financial
institution specified in the applicable prospectus supplement.
"Limited Guarantee" means a limited financial guarantee issued by a guarantor
named in the prospectus supplement.
"Liquidation Expenses" means unreimbursed expenses incurred in connection
with liquidation or foreclosure.
"Liquidation Proceeds" means cash amounts received and retained in connection
with the liquidation of defaulted mortgage loans, by foreclosure or otherwise.
"LTV/CLTV" means loan-to-value ratio/combined loan-to-value ratio.
"Mark to Market Regulations" means final regulations issued by the Internal
Revenue Service under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers.
"Master Servicing Fee" means the percentage per annum described in the
related prospectus supplement, which may vary under certain circumstances, of
the outstanding principal balance of each mortgage loan. This compensation will
be retained by the master servicer from collections of interest on the mortgage
loan in the related trust fund.
"MERS" means the Mortgage Electronic Registration Systems, Inc.
"Monthly Report" means the statements containing information with respect to
principal and interest payments and the related trust fund.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Rate" is the per annum rate at which the mortgage notes accrue
interest.
153
"Mortgaged Properties" means the real property that secures repayment of the
mortgage loans.
"NCUA" means National Credit Union Administration.
"Net Liquidation Proceeds" means Liquidation Proceeds net of Liquidation
Expenses.
"New Regulations" means the final regulations recently issued by the Internal
Revenue Service which would provide alternative methods of satisfying the
beneficial ownership certification requirement. The New Regulations will be
effective January 1, 2001.
"Non-ERISA Plans" means certain employee benefit plans covering only self-
employed individuals.
"Non-Pro Rata Certificate" means a Regular Certificate on which principal is
distributed in a single installment or by lots of specified principal amounts
upon the request of a certificateholder or by random lot.
"Non-U.S. Person" means any person who is not a U.S. Person.
"OCC" means the Office of the Comptroller of the Currency.
"OID Regulations" means the Treasury regulations issued on February 2, 1994,
as amended on June 14, 1996, under Code Section 1271 through 1273 and 1275.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and certain
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity
as a nominee for another will, with respect to the interest, be treated as a
Pass-Through Entity.
"Pass-Through Rate" means the pass-through rate borne by the certificates of
a specific series, as specified in the applicable prospectus supplement.
"Permitted Investments" means, unless otherwise specified in the applicable
prospectus supplement, obligations of the United States and certain agencies of
the United States, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks and certain
repurchase agreements of United States government securities with eligible
commercial banks.
"Pre-Funding Account" means an account established to provide funds for the
acquisition of Subsequent Mortgage Loans.
"Prepayment Assumption" means the assumed rate of prepayment of the mortgage
loans.
154
"Primary Insurer" means the issuer of a Primary Mortgage Insurance Policy.
"Primary Mortgage Insurance Policy" means primary mortgage guaranty insurance
policies which cover wholly or partially the principal balances of certain
Mortgaged Properties.
"Principal Prepayments" means payments of principal that are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of the payments.
"PTE 83-1" means Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts.
"Purchase Price" means the price that the depositor pays for mortgage loans
that it is obligated to repurchase from any trust fund due to any breach of any
representation or warranty. This price is equal to 100% of the principal
balance of the mortgage loan as of the date of repurchase plus accrued interest
at the Mortgage Rate to the first day of the month in which the repurchase
price is to be distributed.
"RCRA" means the Resource Conservation and Recovery Act, as amended.
"Record Date" means the record date specified in the related prospectus
supplement.
"Regular Certificates" are certificates considered to evidence ownership of
"regular interests" in a REMIC.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"REMIC Certificates" are securities representing interests in a trust fund,
or a portion of a trust fund, that the trustee will elect to have treated as a
REMIC under the REMIC Provisions of the Code.
"REMIC Pool" is an entity or portion of an entity as to which a REMIC
election will be made.
"REMIC Provisions" means Sections 860A through 860G of the Code.
"REMIC Regulations" means the Treasury regulations issued under the REMIC
Provisions.
"Reserve Fund" means one or more reserve funds for a series established and
maintained with the trustee, which provide credit support with respect to a
series of certificates.
"Residual Certificates" are certificates considered to evidence ownership of
"residual interests" in a REMIC.
"Restricted Group" means ERISA Plans sponsored by the depositor, the
underwriter specified in the applicable prospectus supplement, the master
servicer, the trustee, any
155
insurer with respect to the mortgage loans, any obligor with respect to
mortgage loans included in the trust fund constituting more than five percent
of the aggregate unamortized principal balance of the assets in the trust fund,
or any affiliate of these parties.
"Retained Interest" means the portion of the Mortgage Rate not included in
the trust fund.
"Riegle Act" means the Riegle Community Development and Regulatory
Improvement Act of 1994.
"Rules" means the rules, regulations and procedures creating and affecting
DTC and its operations.
"S&P" means Standard & Poor's Ratings Services.
"Securities Act" means the Securities Act of 1933, as amended.
"SBJPA of 1996" means the Small Business Job Protection Act of 1996.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"Standard Certificates" are certificates in a series where there is no
Retained Interest or "excess" servicing with respect to the mortgage loans
underlying the certificates of a series, and where the certificates are not
designated as Stripped Certificates.
"Startup Day" means the date of issuance of the REMIC Certificates.
"Subsequent Mortgage Loans" means additional mortgage loans transfered by the
depositor to the related trust fund after the closing date for the related
certificates.
"Subsidy Loans" are mortgage loans subject to temporary interest subsidy
agreements under which the monthly payments made by the related mortgagors will
be less than the scheduled monthly payments on the mortgage loans with the
present value of the resulting difference in payment being provided by the
employer of the mortgagor generally on an annual basis.
"Surety Bond" means a financial guaranty insurance policy or surety bond
issued by a financial guarantee insurance company specified in the applicable
prospectus supplement.
"Taxable Mortgage Pools" are certain entities issuing non-REMIC debt
obligations secured by real estate mortgages.
"Texas Home Equity Laws" means Section 50(a)(6) of Article XVI of the
Constitution of Texas.
"Tiered REMICs" means a trust fund where two or more separate elections are
made to treat designated portions of the related trust fund as REMICs.
156
"TILA Amendment" means the bankruptcy reform legislation being considered by
the Senate that would amend the Bankruptcy Code to authorize bankruptcy court
judges to disallow claims based on secured debt if the creditor failed to
comply with certain provisions of the federal Truth in Lending Act.
"Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
"U.S. Person" means:
(1)a citizen or resident of the United States,
(2)a corporation, partnership, unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise, created or
organized in or under the laws of the United States, any state of the
United States or the District of Columbia, including an entity treated
as a corporation or partnership for federal income tax purposes,
(3) an estate that is subject to United States federal income tax
regardless of its source, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or
more U.S. Persons have the authority to control all substantial
decisions of the trust, or, to the extent provided in applicable
Treasury regulations, certain trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons.
"VA" means the Veterans Administration.
"VA Guarantee" means a partial guarantee for a mortgage loan provided under
the Serviceman's Readjustment Act of 1944, as amended.
157
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of book-entry certificates
or "global securities" will be available only in book-entry form. Investors in
the global securities may hold the global securities through any of DTC, CEDEL
or Euroclear. The global securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors holding global securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior Residential Mortgage Pass-Through
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and participants
holding certificates will be effected on a delivery-against-payment basis
through the respective Depositaries of CEDEL and Euroclear, in such capacity,
and as DTC participants.
Non-U.S. Holders of global securities will be subject to U.S. withholding
taxes unless they meet certain requirements and deliver appropriate U.S. tax
documents to the securities clearing organizations or their participants.
Initial Settlement
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
depositaries, which in turn will hold the positions in accounts as
participants.
Investors electing to hold their global securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global securities through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no "lock-
up" or restricted period. Global securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
A-1
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between Participants. Secondary market trading between participants
will be settled using the procedures applicable to prior Residential Mortgage
Pass-Through Certificates issues in same-day funds.
Trading Between Cedel and/or Euroclear Participants. Secondary market trading
between CEDEL participants or Euroclear participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading Between DTC Seller and CEDEL or Euroclear Purchaser. When global
securities are to be transferred from the account of a participant to the
account of a CEDEL participant or a Euroclear participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL participant or
Euroclear participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective depositary, as the case may be, to
receive the global securities against payment. Payment will include interest
accrued on the global securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of the actual number of
days in the accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective depositary of the participant's account against
delivery of the global securities. After settlement has been completed, the
global securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
participant's or Euroclear participant's account. The securities credit will
appear the next day, European time, and the cash debt will be back-valued to,
and the interest on the global securities will accrue from, the value date,
which would be the preceding day when settlement occurred in New York. If
settlement is not completed on the intended value date, the CEDEL or Euroclear
cash debt will be valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the global
securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL participants or Euroclear participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL participants or Euroclear participants purchasing global
securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the global securities were credited to their accounts. However,
interest on the global securities would accrue from the value date.
A-2
Therefore, in many cases the investment income on the global securities earned
during that one-day period may substantially reduce or offset the amount of the
overdraft charges, although this result will depend on each CEDEL participant's
or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
participants can employ their usual procedures for sending global securities to
the respective European depositary for the benefit of CEDEL participants or
Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the participants a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading Between CEDEL or Euroclear Seller and DTC Purchaser. Due to time zone
differences in their favor, CEDEL participants and Euroclear participants may
employ their customary procedures for transactions in which global securities
are to be transferred by the respective clearing system, through the respective
depositary, to a participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL participant or Euroclear participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective depositary, as appropriate, to deliver the global
securities to the DTC participant's account against payment. Payment will
include interest accrued on the global securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in the accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL participant or
Euroclear participant the following day, and receipt of the cash proceeds in
the CEDEL participant's or Euroclear participant's account will be back-valued
to the value date, which would be the preceding day, when settlement occurred
in New York. Should the CEDEL participant or Euroclear participant have a line
of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date, receipt of the cash proceeds in
the CEDEL participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase global
securities from DTC participants for delivery to CEDEL participants or
Euroclear participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
. borrowing through CEDEL or Euroclear for one day, until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts
in accordance with the clearing system's customary procedures;
. borrowing the global securities in the U.S. from a participant no later
than one day prior to settlement, which would give the global securities
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
A-3
. staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the participant is at least
one day prior to the value date for the sale to the CEDEL participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through CEDEL or
Euroclear, or through DTC if the holder has an address outside the U.S., will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest, including original issue discount, on registered debt issued by
U.S. Persons, unless:
. each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in
the chain of intermediaries between the beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements and
. the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of global
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
Exemption for Non-U.S. Persons with Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty Countries
(Form 1001). Non-U.S. Persons that are certificate owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate, depending on the treaty terms, by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the certificate owner
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The certificate owner of a
global security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds,
the clearing agency, in the case of persons holding directly on the books of
the clearing agency. Except as noted below, Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year.
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The Internal Revenue Service recently issued New Regulations which would
provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations will be
effective January 1, 2001. Current withholding certificates will remain valid
until the earlier of December 31, 2000 or the date of expiration of the
certificate under the rules as currently in effect. The New Regulations would
require, in the case of Regular Certificates held by a foreign partnership,
that:
. the certification described above be provided by the partners rather
than by the foreign partnership and
. the partnership provide certain information, including a United States
taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the global securities.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee................................................... *
Printing and Engraving Fees............................................ *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Trustee Fees and Expenses.............................................. *
Rating Agency Fees..................................................... *
Miscellaneous.......................................................... *
Total................................................................ *
- --------
* To be provided by amendment.
Item 15. Indemnification of Trustees.
The Registrant is a business trust formed under the laws of the State of
Delaware. Section 3817 of Chapter 38 of Title 12 of the Delaware Code provides
that a Delaware business trust may indemnify any persons, including trustees
and beneficial owners, from and against any and all claims and demands
whatsoever. The Trust Agreement (the "Trust Agreement") provides that to the
extent available trust property is insufficient, JV Mortgage Capital, L.P., as
depositor to the Registrant (in such capacity, the "Depositor") or its
successors and assigns (the "Owners"), will indemnify Wilmington Trust Company,
as owner trustee, and any of its officers, trustees, employees or agents and
each co-trustee against any and all liabilities, obligations, losses, damages,
taxes, claims, actions, suits, costs, expenses and disbursements of any kind
and nature whatsoever incurred or arising out of or in connection with the
administration of the Registrant.
Item 16. Exhibits.
1.1 -- Form of Underwriting Agreement.*
3.1 -- Trust Agreement of the Registrant.*
4.1 -- Form of Pooling and Servicing Agreement.*
5.1 -- Opinion of Cadwalader, Wickersham & Taft.*
8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters.*
24.1 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibits 5.1 and 8.1).*
25.1 -- Powers of Attorney.*
- --------
* Previously filed.
Item 17. Undertakings.
A. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus
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required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect
in the prospectus any facts or events arising after the effective date of
the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; (iii) to
include any material information with respect to the plan of distribution
not previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to Section
13 or Section l5(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. Undertaking in connection with incorporation by reference of certain
filings under the Securities Exchange Act of 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C.Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, co-trustees, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 15 above, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
co-trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this Pre-
Effective Amendment No. 1 to Form S-3 Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Prospect Heights, State of Illinois, on the 12th day of November, 1999.
JV Capital Trust
/s/ Michael M. Forester
By: _________________________________
Name: Michael M. Forester
Title: Co-Trustee
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Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-Effective Amendment No. 1 to Form S-3 Registration Statement has been
signed below by the following persons in the capacities indicated.
Co-Trustee and Chief
Executive Officer November 12,
* 1999
- -------------------------------------
Douglas A. Friedrich
Co-Trustee, Chief
Accounting Officer November 12,
* and Chief Financial 1999
- ------------------------------------- Officer
Christine K. Worwa
Co-Trustee
/s/ Michael M. Forester November 12,
- ------------------------------------- 1999
Michael M. Forester
Co-Trustee
* November 12,
- ------------------------------------- 1999
Richard Boruta
Co-Trustee
* November 12,
- ------------------------------------- 1999
Steve Hires
Co-Trustee
* November 12,
- ------------------------------------- 1999
Christopher Oddleifson
By: /s/ Michael M. Forester
---------------------------------
Michael M. Forester
Attorney-in-Fact
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